Short Run Fluctuations in the Economy
• Shows booms and busts in the economy (historical slide of business cycles since 1929)
• Short Economic Recessions
• The above comes fromAggregate Expenditure identity
o Y= C + I+ G + NX
o the left side is the aggregate supply while the left is the aggregate demand
• Aggregate Demand Curve- relates the dprice level to aggregateexpemdentiure on the economy’s goods (…)
o on vertical axis = P a measure of the overall price level
o on horizontal axis = total amount of aggregate expenditure or GDP
o the higher the price level the lowerthe aggregate expenditure
o Quantity Demanded- point on the demand curve
• Point of aggregate expenditure
• Moving along the curve
o Increase in Aggregate Expenditure P ^ and Y goes down
o Whyis it downward slopping, when Price level changes these effects occurs
• The Wealth Effect- due to the consumption function, wealth decrease when the price level goes up, and hence consumption goesdown and hence Y goes down
• Interest Rate Effect- when the price level goes up the real interest rate goes up, there is more incentive to save it costs more to borrow. Together those mean thatconsumption spending goes down.
• Investment goes down when interest rates go down
o Lower Net Present Value
• Discount rate is great than the Rate of Return
o It costs more to borrow
• Net Exportsgoes down: logic chain
o r goes up>
• International Trade Effect- when domestic price levels goes up real exchange rate goes up NX goes down, aggregate expenditure effect
• Aggregatedemand the whole line, not just at one point
• An increase in aggregate demand means a rightward shift of the line
• Same price level but higher aggregates spending
• A decrease in aggregateexpenditure means a leftward shift in the demand curve
• Same price level, but lower aggregate expenditure
• What could shift the Aggregate demand curve?
• Monetary policy-...
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