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goods and services in the economy. To derive the aggregate demand curve, we examine what happens to aggregate output (income) (Y) when the price level (P) changes, assuming no changes in government spending (G), net taxes (T), or the monetary policy variable (Ms).
P M d r I AE Y
At all points along the AD curve, both the goods market and the money market are in equilibrium.
consumption brought about by an increase in the interest rate contributes to the overall decrease in output. The real wealth effect, or real balance, effect is the change in consumption brought about by a change in real wealth that results from a change in the price level.
curve, the aggregate quantity of output demanded is exactly equal to planned aggregate expenditure.
Y=C+I+G
equilibrium condition
a given price level shifts the aggregate demand curve to the right.
An increase in government purchases or a decrease in net taxes shifts the aggregate demand curve to the right.
and services in the economy. The aggregate supply (AS) curve is a graph that shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level.
that input prices are constant. In macroeconomics, an increase in the overall price level means that at least some input prices will be rising as well. The outputs of some firms are the inputs of other firms.
economy as a whole is operating at full capacity. As the economy approaches maximum capacity, firms respond to further increases in demand only by raising prices.
output, an increase in aggregate demand is likely to result in an increase in output with little or no increase in the overall price level. There must be a lag between changes in input prices and changes in output prices, otherwise the aggregate supply (price/output response) curve would be vertical.
Waste, inefficiency and overregulation. Bad weather, natural disasters, destruction from wars
Causes of Inflation
Inflation is an increase in the overall price level.
price level continues to rise over some fairly long period of time.
Causes of Inflation
Demand-pull inflation is inflation initiated by an increase in aggregate demand.
Causes of Inflation
Cost-push, or supplyside, inflation is inflation caused by an increase in costs.
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