TAILIEUCHUNG - Lecture Economics: The basics (2/e): Chapter 12 App - Michael Mandel

Chapter 12 App - Delving deeper into macroeconomics. After reading the material in this chapter, you should be able to: Define aggregate supply and aggregate demand, describe the effect of an aggregate supply or demand shift on prices and output. | Appendix: Chapter 12 Delving Deeper Into Macroeconomics McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Define aggregate supply and aggregate demand. Describe the effect of an aggregate supply or demand shift on prices and output. 12A- Aggregate Demand Aggregate demand is the sum of the quantity demanded from the different sectors of the economy: personal consumption (C), nonresidential investment (NR), residential investment (R), government consumption and investment (G), inventory investment (I), and net exports (NX). The equation for aggregate demand (AD) is: AD = C + NR + R + G + I + NX 12A- Aggregate Demand Curve The aggregate demand curve links the average price level of the whole economy with aggregate quantity demanded. The aggregate demand curve is downward-sloping. Thus, a decline in the overall price level leads to an increase in the quantity demanded by consumers, businesses, and government. 12A- Aggregate Demand Curve Lower aggregate prices leads to more aggregate demand for the following reasons: First is the wealth effect. Lower prices lead to an increase in the value of your assets. This higher wealth leads to more spending. Second is the interest rate effect. Lower prices lead to lower interest rates, which increases consumption. 12A- Aggregate Demand Curve Third is the exchange rate effect. As interest rates fall, it become less appealing for foreigners to invest in the . The demand for dollars falls, and the dollar depreciates relative to other currencies. This increases net exports and GDP. 12A- Aggregate Demand Curve 12A- Aggregate Supply Aggregate supply is the quantity of goods and services that the economy produces. The aggregate supply curve links the average price level of the economy with the quantity of goods and services produced. The short-term aggregate supply curve is upward-sloping. But, in the long run, aggregate supply is vertical because

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