8- The Aggregate Demand Curve

Question 1

Difference between AD and AE curve

Answer 1

AD curve incorporates the price level.
Changes in P which shift AE cause movements along AD line.

Question 2

Alternative way of determining equilibrium GDP

Answer 2

Where Investment savings (IS) = Liquidity of preference-money-supply (LM).

Question 3

Real wealth

Answer 3

= Asset price/price rise

Question 4

Inside wealth

Answer 4

An asset issued by an agent in the private sector (say a firm) and held by another agent (say a household) in the same sector.
A rise in price raises real wealth of the bond-issuer, who will have to part with less purchasing power when the bond is redeemed but lowers the real value of the bond holder who receives less real terms on redemption.
If bond issuer and holder are in the same sector the effect on non bank private sector wealth is zero.

Question 5

Outside wealth

Answer 5

Outside assets are those held by agents in the private sector of the domestic but which are issued by an agent in another sector usually by government or overseas sector.

Question 6

Consumption function modified

Answer 6

C= f(Yd, A/P)
- Price rise, real C will fall, AE fall
- Price fall, real C will rise, AE rise

Question 7

What does every point of AD curve represent?

Answer 7

Market equilibrium

Question 8

Determinants/shifts of AD

Answer 8

• Investment
• Gov spending
• Interest rate
• Exchange rate or foreign price level (competitiveness)- P*E
• Autonomous consumption
• Taxation
• Net exports
• Any variable which shifts AE up, will shift AD right

Question 9

AD curve and the multiplier

Answer 9

• Price changes/inflation impacts the multiplier
• If price stays constant, the multiplier represents the magnitude of the shifts.