Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Real bills doctrine wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Economic democracy wikipedia , lookup
Money supply wikipedia , lookup
Monetary policy wikipedia , lookup
Business cycle wikipedia , lookup
Economic calculation problem wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Module 17 Notes 2 effects that help explain the reason that the Aggregate Demand (AD) curve is down sloping. The Wealth Effect -- At higher price levels the purchasing power of assets such as savings is worth less; consumers feel less well off and thus spend less, demanding fewer final goods and services (GDP). The Interest Rate Effect- At higher price levels people need to increase their money holdings to purchase the same basket of goods. There is an increased demand for money which drives up the price paid for its use, interest rates, causing BI to decrease. This contributes to a lower level of aggregate demand for final goods and services. These are the factors or determinants of Aggregate Demand and the components of AD they affect.( C, I, G X or IM). a.) Change in expectations – Affects Consumer Spending and Business Investment components of Aggregate Demand. More optimism – Increases spending and Aggregate Demand Less optimism – Decreases spending and Aggregate Demand b.) Changes in Wealth – Affects Consumer Spending component of Aggregate Demand. When the real value of household assets increase (financial investments or real estate values increase), purchasing power and consumer spending increases leading to an increase in Aggregate Demand. When the real value of household assets decrease (financial investments or real estate values decrease), purchasing power and consumer spending decreases leading to a decrease in Aggregate Demand. c.) Size of stock of existing physical capital Affects Business Investment component of Aggregate Demand. The more physical capital businesses already have, the less incentive they’ll have to spend on more capital, leading to a decrease in Aggregate Demand. The less physical capital businesses have, assuming there is optimism about future sales, the more incentive they’ll have to spend on more capital, leading to an increase in Aggregate Demand. d.) Fiscal Policy The use of either government spending or tax policy to stabilize the economy Change in Taxes – affects Consumer Spending component of Aggregate Demand. Change in Government Spending – affects Government Spending component of Aggregate Demand. Expansionary Fiscal Policy -- taxes and/ or government spending -- Aggregate Demand Contractionary Fiscal Policy -- taxes and /or government spending -- Aggregate Demand e.) Monetary Policy Changes in the money supply and interest rates (i) to stabilize the economy. This policy is conducted by the Federal Reserve (our Central Bank) Affects Consumer Spending (sectors sensitive to interest rates such as autos, furniture, appliances) and Business Investment components of Aggregate Demand. Expansionary Monetary Policy -- i Consumer Spending, Business Investment Aggregate Demand Contractionary Monetary Policy -- i Consumer Spending, Business Investment Aggregate Demand