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23.1: Demand Side of the Economy - Coggle Diagram
23.1: Demand Side of the Economy
Exogenous Changes in Price Level
AE curve shifts in response to a change in P b/c change in P affects desired consumption & desired net exports; AE = C + I + G + NX, so changes in C or NX affect AE
AE = C + I + G + NX,
so changes in C or NX affect AE
Changes in Consumption
ONE RELATIONSHIP
→
changes in P
towards
HOUSEHOLD wealth
which leads to
desired spending
WEALTH & MONEY;
P↑ → ↓private sector wealth/household weath → ↓C → ↓AE
; LOWERS real value of money, what you can buy
ONE RELATIONSHIP
→ changes in P
towards
BONDS wealth
which leads to
desired spending
WEALTH & BONDS; P↑ → value of loan repayment falls → ↓Lender's wealth and ↑Borrower's wealth
e.g bondholder lends money to issuer of bond (borrower);
rise in P means repayment to bondholder is lower real value of bond,
→ decline in wealth for bondholder
Changes in Net Exports
when ↑P → ↓X (exports)/ ↑M (imports) → ↓NX → ↓AE
; less exports mean reduction in consumer spending local scale...
Changes in Equilibrium
Changes in Equilibrium GDP
when ↑P → ↓C and/or ↓NX → ↓AE → ↓Ye
; exogenous change in P causes AE curve to shift and Ye to change
Aggregate Demand Curve
Aggregate Demand Curve
What is AD CURVE? AD curve = relationship b/w P and Y for which Y = Y = E (AE)
; keeps track of various E points
when ↑P, movement along AD curve is ↑
change in P causing shifts in AE curve are
movements
along AD curve
AD Curve is NOT a Micro Demand Curve
AD CURVE IS NEGATIVELY SLOPED; TWO REASONS
↓P leads to a ↑ in private-sector wealth, which increases desired consumption and thus leads to an ↑ in E
↓P leads to a ↑ in NX and leads to an ↑ in E
↑P = movement upward and left along AD curve, reflecting a fall in E
Shifts in AD curve
any change – other than a change in P – that causes AE curve to shift; AD SHIFT CALLED AGGREGATE DEMAND SHOCK
↑AE (↓P) = AD curve to the right; ↓AE (↑P) = AD curve to the left
Simple multiplier is horizontal shift in AD HOLDING PRICES CONSTANT