Chapter 2-: Aggregate Demand and Aggregate Supply

As output falls,

Click the card to flip 👆

1 / 21

Terms in this set (21)

As output falls,

unemployment rises

During a recession investment spending,

Three effects explain why AD curve slopes downward:

Wealth effect (C ) - Interest-rate effect (I) -Exchange-rate effect (NX)

Assumption of the aggregate demand model about Government spending:

It is fixed by policy

• Price level and consumption (C): the wealth effect

- Decrease in price level

• Increase in the real value of money
• Consumers are wealthier
• Increase in consumer spending
• Increase in quantity demanded of goods and services

Price level and investment (I): the interest-rate effect

Decrease in price level •

Decrease in the interest rate
• Increase spending on investment goods
• Increase in quantity demanded of goods and services

Price level and net exports (NX): the exchange-rate effect

Decrease in U.S. price level
• Decrease in the interest rate
• U.S. dollar depreciates
• Stimulates U.S. net exports
• Increase in quantity demanded of goods and services

Summary: a fall in price level

- Increases quantity of goods and services demanded

Because:
1. Consumers are wealthier: stimulates the demand for consumption goods
2. Interest rates fall: stimulates the demand for investment goods
3. Currency depreciates: stimulates the demand for net exports

Summary: a rise in price level

Decreases the quantity of goods and services demanded

-Because:
1. Consumers are poorer: depress consumer spending
2. Higher interest rates fall: depress investment spending
3. Currency appreciates: depress net exports