The Aggregate Demand Curve Flashcards
What is the nbps and what is it made up of
nbps = non-bank private sector
Its made up of cash bank deposits and bonds all with monetary value
What happens to the nbps if there is a rise in P
The real value of the assets will reduce as other things are now more expensive meaning more money is needed
What is Inside wealth and what happens if P rises
Inside wealth is when an asset is issued by an agent in the private sector and held by another agent in the same sector
A rise in P will increase the real wealth of the bond issuer who will part with less purchasing power when the bond is redeemed
What is Outside wealth and what happens if there is a rise in P
Outside assets are issued by an agent in one sector and held by an agent in another sector
A rise in P will increase the outside wealth of the nbps
What’s the relationship between AE and P using consumption
As P rises for a stock of nominal outside wealth, real wealth will fall and so will consumption leading to a fall in AE
How does NX provide a way in which P changes can affect AE
When domestic price levels fall, domestic goods become relatively cheaper meaning that people will buy domestic making AE and NX lines shift upwards
What does a rise in P change
Reduces consumption via the fall in nbps outside wealth and reduces NX as domestic competitiveness declines
This leads to a fall in AE and a shift down in the desired expenditure schedule
What does the AD curve show the relationship between and how is AE linked in
Relates real GDP and P
A change in P causes a shift in AE which causes movements along the AD line
What is true about points on the AD curve
Desired expenditure is equal to actual output
What is true about points to the left of the AD curve
It shows combinations of GDP and P where AE is greater than Y meaning there is pressure on Y to rise as firms could sell more than at their current output
What is true about points to the right of the AD curve
Shows combinations of P and GDP where AE is greater than Y and there is pressure for output to fall as firms are unable to sell what they are producing
What are shifts in the AD curve caused by
Taxation
Autonomous consumption
Net Exports
Investment
Government Spending
What happens to AD is AE shifts up
If AE shifts up then AD shifts right and if AE goes down then AD shifts left
