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O-K-State ECON 2203 - Aggregate Demand Curve
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Econ 101 1st EditionThe Aggregate Demand Curves (AD)• The Aggregate Demand Curves (AD)– the total quantity of goods and services demanded in the economy at any given price level. •Whose behavior determines the aggregate demand?– Consumers (C)– Firms (I)– Government (G)– Consumers abroad (NX)42These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Why the ADCurve is Downward SlopingPYADP1P2Y2Y1= C + I + G + NX43Summary:Government Spending (G) is fixed by policy. The other three components of Aggregate Demand –consumption, investment, and net exports–depend on economic conditions and, in particular, on the price levelThe price level and Consumption: The Wealth Effect• Consider the money that you hold in your wallet and your bank account.The nominal value is fixed.• Suppose Price (P) drops– With same amount of dollars, you could purchase more goods and services.– You may feel wealthier– It encourages you to spend more (C rises).• Results: Larger quantity goods and services are demanded (C rises)44The price level and Investment: The Interest-Rate Effect• Consider the money that you hold in your wallet and your bank account. The nominal value is fixed.• Suppose Price (P) drops,– You need less money to buy the same amount of goods and services.– You may save more money to banks.– The supply of loanable funds increases.– It drives down interest rates (r drops).– It encourages firms to borrow more to buy capitals and households to borrow more to buy new houses (I rises).• Results: Increases the quantity goods and services are demanded (I rises)45The price level and Net Exports: The Exchange-Rate Effect• Suppose Price (P) drops,– U.S. Interest rates drops (r drops)– Foreigners may invest their money into other countries.– The real value of the dollar decreases (Exchange rate drops).– Foreigners can exchange less U.S. dollars with the same amount of their currency.– The relative price of U.S. goods and services is less.– It encourages foreigners to buy more U.S. goods and services. (NX rises).• Results: Increase goods and services are demanded (NX rises)46The Slope of the ADCurve: SummaryA decrease in Pincreases the quantity of goods and services demanded because:PYADP1Y1P2Y247the wealth effect (C rises)the interest -rate effect ( I rises )the exchange -rate effect ( NX rises


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O-K-State ECON 2203 - Aggregate Demand Curve

Type: Lecture Note
Pages: 4
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