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Econ 202 – McConnell & Brue
Chapter #11 - Aggregate Demand and Aggregate Supply
I. Aggregate Demand
Quantity of goods and services which will be purchased at each price level
- Relationship between the price level (PL) and output purchased (RDO)
II. Reasons for Shape of AD Curve
1. Interest rate effect
2. Wealth effect (or real balance effect)
3. Foreign purchases effect
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III. Non-price Level Determinant of AD
[When these change, causes shifts in AD]
1. Changes in consumer spending
1. Consumer wealth
2. Consumer expectations
3. Consumer indebtedness
4. Taxes
2. Changes in Business Investment Spending
1. Interest rates
2. Profit expectations
3. Taxes
4. Technology
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3. Changes in Government Spending
4. Changes in Net Export Spending
IV. Aggregate Supply
Shows amount of real domestic output (RDO) that will be produced at each price level.
Relationship between PL and output produced.
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V. Ranges of AS Functions
1. Horizontal - Increase RDO with no increase in PL
2. Intermediate - Increase RDO with some PL change
3. Vertical - Impossible to increase RDO
VI. Non-price Level Determinants of AS
[When change, causes shifts in AS curve.]
1. Changes in input prices.
1.
Domestic resource availability
2.
Prices of imported resources
3.
Market power--labor unions and monopolies
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2. Changes in Productivity
1. Labor
2. Technology
3. New resources discovered
3. Changes in the Legal and Institutional Environment
1. Business taxes and subsidies
2. Anti-trust regulations and enforcement
3. Environmental regulations
VII. Practice Effects
Practice effects of shifts in both AS and AD on price level and real national output changes.
1. Text - 14th Ed., page 241,
questions 7 and 9.
2. Text - 15th Ed., page 222-223,
questions 7 and 8.
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VIII. The Multiplier Effect and Price Level Changes in different ranges of AS
1. Horizontal Range - full multiplier effect.
2. Intermediate Range - reduced multiplier effect.
Part of multiplier effect dissipated