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AGREGATE DEMAND AND AGREGATE SUPPLY, Economics-Aggregate-Demand-AD-Curve…
AGREGATE DEMAND AND AGREGATE SUPPLY
AGREGATE SUPPLY
SHORT RUN
the aggregate-supply curve is upward sloping
represents an economy’s potential output with full employment of an economy’s resources
DEFINITION
The aggregate supply curve is an economic graph that indicates how many goods and services an economy’s firms are willing and able to produce in a given period
LONG RUN
the aggregate-supply curve is vertical
an economy’s production of goods and services depends on its supplies
represents the classical dichotomy and money neutrality
the price level does not affect long run determinants of real GDP
AGREGATE DEMAND
Reasons for a downward‐sloping aggregate demand curve
net exports effect
As the domestic price level rises, foreign‐made goods become relatively cheaper so that the demand for imports increases
the rise in the domestic price level also means that domestic‐made goods are relatively more expensive to foreign buyers so that the demand for exports decreases
exports decrease and imports increase, net exports (exports ‐ imports) decrease
wealth effect
aggregate demand curve is drawn under the assumption that the government holds the supply of money constant
the price level rises, the wealth of the economy, as measured by the supply of money, declines in value because the purchasing power of money falls.
buyers become poorer, they reduce their purchases of all goods and services
as the price level falls, the purchasing power of money rises
Buyers become wealthier and are able to purchase more goods
interest rate effect
the price level rises, households and firms require more money to handle their transactions
the supply of money is fixed
The increased demand for a fixed supply of money causes the price of money, the interest rate, to rise
As the interest rate rises, spending that is sensitive to rate of interest will decline
the interest rate effect provides another reason for the inverse relationship between the price level and the demand for real GDP
DEFINITION
The aggregate demand curve is a economic graph that indicates how many goods and services households, firms, and the government are willing and able to buy.
AD= C + I + G + (X – M)
The aggregate demand curve is defined in terms of the price level
As wages change, so do incomes
assume that prices and incomes remain constant in the construction of the aggregate demand curve
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