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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

Wealth Effect

PL increases and assets value decreases

Money Multiplier

change in rGDP / initial change in spending

Marginal Propensities

1 / (1-MPC) OR 1 / MPS


Determinants of AD (NOT demand)

Change in Consumer Spending
-Consumer Wealth

Change in Ig
-Interest rates (real)
-expected returns

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
-Business taxes/subsidies
-gov. regulation

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