Aggregate Demand and Aggregate Supply - Aggregate Demand o The amount of real GDP desired at each price level Both Domestic and Foreigno Inverse Relationship Real Balance Effect - When the price level falls, the purchasing power of money increases, which can increase spending Interest Rate Effect - A decline in the price level means lower interest rates (the price of money) falls, increasing spending Foreign Purchases Effect - When the price level falls, other things equal, U.S. prices fall relative to foreign prices, increasing spending on U.S. exports o- Changes in Aggregate Demando Change in consumer spending Wealth - If all the sudden people become richero They demand more goods and services- If decreases, vice versa Consumer Expectations Household Borrowing Personal Taxeso Changes in Investment Interest Rates Expected Returns o Change in Government Spending Changes in transportation or building spending Changes in military spendingo Change in Net Export Spending National income Abroad - If Europeans are richer, they buy more American goods, and vice versa Exchange Rates- if the US dollar appreciates, the dollar is worth more, makes USgoods more expensive, relative to others, discourages exports o The Multiplier Effect- greater ultimate change in demand o- Aggregate Supplyo Total Real Output produced at each price level o Relationship depends only on Immediate Short run Long
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