Sunday, February 14, 2010

Aggregate Demand

Summary: Real money balances.

In AP Macroeconomics, I like to show that the AD curve slopes downward and to the right because of real money balances. That is, at higher price levels, consumers will buy less. The graph to the right shows that less real GDP is purchased when the price level is 200 than 50. The AD should be curved but this blogs just illustrates the relationship.

The other reasons are the effect of interest rates and the exchange rate.

As the price level falls, more real GDP is produced. What happens to employment?

About the Author: Mike Fladlien is an AP Economics teacher from Muscatine High School in Muscatine, IA. He is an author, and also publishes the Mikeroeconomics and iMacroeconomics VB blogs.


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