Downward Sloping AD because...
- real balances effect
- interest rate effect
- foreign purchases effect (net export)
Real Balances Effect
effect of decrease in price and rise in consumption ??
Interest Rate Effect
PL inc, so Nominal interest rate inc, spending dec.
Net Export Effect
PL inc, domestic goods are relatively more expensive so Xn (exports) decrease
PL increases and assets value decreases
change in rGDP / initial change in spending
1 / (1-MPC) OR 1 / MPS
MPC+MPS = 1
Determinants of AD (NOT demand)
Change in Consumer Spending
Change in Ig
-Interest rates (real)
Change in Gov. spending
-Net Export Spending: exchange rates, national income
-NOT transfer payments
Determinants of AS (NOT supply)
Change in cost of Production
-wage cost: min. wage
-Resource price (incl. exchange rates of imported g/s)
Change in Productivity: (real output / input)
Change in Legal/Institutional Environment
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