Changes in Equilibrium GDP
<aside> š” A rise in the domestic price level (with a constant exchange rate) reduces net exports and causes a downward shift in theĀ AEĀ curve. A fall in the domestic price level increases net exports and causes an upward shift in theĀ AEĀ curve.
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As prices fallā¦
Wealth effect: Existing wealth is more valuable, consumption rises Relative price effect (considering a fall in domestic prices): exports rise, imports false
The aggregate demand curve shows the relationship between the price level and the equilibrium level of real GDP
ā As price rises, real GDP falls!
Equilibrium GDP is determined by theĀ AEĀ curve for each given price level; the level of equilibrium GDP and its associated price level are then plotted to yield a point on theĀ ADĀ curve
<aside> š” For a given price level, an increase in autonomous aggregate expenditure shifts theĀ AEĀ curve upward and theĀ AD curve to the right. A fall in autonomous aggregate expenditure shifts theĀ AEĀ curve downward and theĀ ADĀ curve to the left.
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Aggregate supply refers to the total output of goods and services that firms would like to produce and sell. The aggregate supply (AS) curve relates the price level to the quantity of output that firms would like to produce and sell:
There exists 2 assumptions:
<aside> š” Increases in factor prices and other input prices are negative aggregate supply shocks that cause theĀ ASĀ curve to shift upward and to the left. Decreases in factor prices and other input prices cause theĀ ASĀ curve to shift downward and to the right.
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