L9._The_Aggregate_Demand_Curve_22

What does the Aggregate Demand (AD) curve represent in macroeconomics?

The AD curve represents the relationship between real GDP and the aggregate price level, showing that desired expenditure equals actual output.

What happens to Aggregate Expenditure (AE) when the price level (P) rises?

When P rises, AE falls and the AE line shifts downwards.

Who argued that consumption depends on permanent income rather than just current income?

Friedman and Modigliani argued that consumption is dependent on permanent or lifetime income.

What is private consumption's link to the price level?

Private consumption tends to decrease as the price level rises because higher prices reduce consumers' purchasing power, leading to lower overall demand for goods and services.

How does a rise in price level (P) affect real assets like cash and bonds?

A rise in P decreases the real value of these assets, resulting in lower real wealth. This decreases the purchasing power of cash and bonds, reducing the overall real wealth available to consumers and businesses, which can lead to a decrease in consumer spending and investment.

What are inside and outside wealth in the context of Aggregate Demand?

Inside wealth refers to assets within the private sector; outside wealth refers to assets in other sectors, often affected differently by price changes.

Inside wealth includes financial assets like stocks and bonds, while outside wealth refers to real estate and other external investments.

What is the impact of falling domestic price levels on net exports (NX)?

Falling domestic price levels make domestic goods cheaper, increasing NX as consumers buy more domestically produced goods.

How does the AD curve relate to microeconomic demand curves?

The AD curve is different from microeconomic demand curves because along the AD curve, all prices are changing, while in micro-demand curves, only the price of one good changes.

What causes shifts in the AD curve?

Shifts in the AD curve are caused by changes in variables other than price level, including investment, government spending, and net exports.

What does the multiplier measure in economics?

The multiplier measures the magnitude of changes in equilibrium GDP in response to changes in autonomous spending at a given price level.

What is the short-run aggregate supply (SRAS) curve based on?

The short-run aggregate supply curve shows the desired quantity firms wish to produce, assuming all input prices remain constant.

What are the two new concepts introduced in the next lecture regarding aggregate supply?

The two new concepts introduced are the short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS). They explain how supply is influenced by time and other factors in the economy.