The Aggregate Demand curve is downward sloping because

The Aggregate Demand curve is downward sloping because of: Real Balances (or wealth) Effect Interest Rate Effect Foreign purchases effect Classify the following statements according to which theory in the chart above they describe. People need more cash which they withdraw from their bank accounts. This leaves banks with less money to lend When American products are expensive foreigners won’t buy them Interest rates go up leading to less investment spending Higher prices reduces purchasing power When Amperican products are expensive Americans will buy foreign products. When prices rise spending is reduced

The Aggregate Demand curve is downward sloping because of: Real Balances (or wealth) Effect Interest Rate Effect Foreign purchases effect Higher prices reduces People need more cash which When American products are purchasing power they withdraw from their bank expensive Americans will buy When prices rise spending is accounts. This leaves banks foreign products reduced with less money to lend When American products are Interest rates go up leading to expensive foreigners won’t less investment spending buy them

The Determinants of AD and SRAS cause the curve to shift Input Prices Determinants Prices of Resources Productivity Wages of AD Classify the Economic situations to the right as either Determinants of aggregate demand or determinants of short run aggregate supply. Determinants of SRAS Change in Consumer Spending – C Change in the price of inputs Change in price level Change in Investment Spending – Ig Change in productivity Change in wages Change in Government Spending - G Net exports – X-M

The Determinants of AD and SRAS cause the curve to shift Determinants of AD Spending – C Input Consumer Prices. Investment of Resources Spending – Ig Productivity Government Spending - G Wages Net exports – X-M Determinants of SRAS Input Prices of resources Productivity Wages Change in Price level is not one of the determinants of AD or SRAS --- it will cause a movement along the curve not a shift.

Draw AD/AS graphs in equilibrium and than make the shift to show Demand Shocks Negative Demand Shock Draw and graph that shows the change indicated Will the shock cause price to increase or decrease? Will the shock cause GDP to increase or decrease? Positive Demand Shock

Demand Shocks LRAS SRAS Positive Demand Shock Price Level Draw and graph that shows the change indicated Price Level Negative Demand Shock P 1 P 2 P 1 SRAS LRAS AD 2 Y 2 Y 1 AD 1 Real GDP AD 1 Y 2 Will the shock cause price to increase or decrease? Decrease Increase Will the shock cause GDP to increase or decrease? Decrease Increase Real GDP

Draw AD/AS graphs in equilibrium and than make the shift to show Supply Shocks Negative Supply Shock Draw and graph that shows the change indicated Will the shock cause price to increase or decrease? Will the shock cause GDP to increase or decrease? Positive Supply Shock

Supply Shocks LRAS Positive Supply Shock SRAS 2 SRAS 1 Price Level Draw and graph that shows the change indicated Price Level Negative Supply Shock LRAS SRAS 1 SRAS 2 P 1 P 2 AD AD Y 2 Y 1 Real GDP Y 1 Y 2 Will the shock cause price to increase or decrease? Increase Decrease Will the shock cause GDP to increase or decrease? Decrease Increase Real GDP

Draw two AD/AS graphs. On one illustrate a recessionary gap. On the other illustrate an inflationary gap.

Recessionary Gap LRAS SRAS LRAS Price Level Inflationary Gap SRAS Pe Pe AD AD Ye Inflationary Gap Real GDP Y 1 Ye Recessionary Gap Real GDP