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Chapter 23 Real GDP and the Price Level in the Short Run - Coggle Diagram
Chapter 23 Real GDP and the Price Level in the Short Run
Effects of an exogenous change in the price level
when the price level goes UP, the desired consumption and desired net exports will go DOWN, and AE goes DOWN, Ye also goes DOWN
The shift occurs because a change in the price level affects desired consumption expenditures and desired net exports
A rise in the price level lowers the real value of money held by the private sector. A fall in the price level raises the real value of money held by the private sector
changes in the price level change the wealth of bondholders and bond issuers, but because the changes offset each other, there is no change in aggregate wealth
relationship between the AE and AD curves
they are negatively related because as the price level
rises
, the AE curve shifts
down
and the economy moves
upward
along the AD curve
Negative slope of the AD curve
a fall in the price level leads to a rise in private-sector wealth, which increases desired consumption and thus leads to an increase in equilibrium GDP
A fall in the price level (for a given exchange rate) leads to a rise in net exports and thus leads to an increase in equilibrium GDP
Positive slope of the AS curve
as firms increase output, the unit costs of SRAC also increases
Macroeconomoic equilibrium
every point on the AD line is equilibrium
Ye (economy in equilibrium) = Ya (actual output) = Y and the actual output is in equilibrium
Aggregate demand shocks
is the change in
exogenous AE
that causes AD to shift,
at any given price level
is a curve showing combinations of real GDP and the price level that make desired aggregate expenditure = to actual national income
the multiplier when the price level varies
if an aggregate demand shock leads to a change in the price level, the ultimate change in real GDP will be less than what is predicted by the simple multiplier. In other words, a wariable price level reduces the value of the multiplier
change in Ye due to a change in autonomous expenditures,
when output prices can vary
aggregate supply shocks
is any shift in the aggregate supply curve caused by an exogenous force
technology and factor prices are exogenous forces