quartz/content/vault/remnote backup/Aggregate Demand and Supply.md

#econ

• Why Does the Aggregate-Demand Curve Slope Downward?
• • The Wealth Effect↔A lower price level increases real wealth, stimulating spending on consumption.
  • The Interest-Rate Effect↔A lower price level reduces the interest rate, stimulating spending on investment.
  • The Exchange-Rate Effect↔A lower price level causes the real exchange rate to depreciate, stimulating spending on net exports.
• Why Might the Aggregate-Demand Curve Shift?
  • Shifts Arising from Changes in Consumption↔An event that causes consumers to spend more at a given price level (a tax cut, a stock market boom) shifts the aggregate-demand curve to the right. An event that causes consumers to spend less at a given price level (a tax hike, a stock market decline) shifts the aggregate-demand curve to the left.
  • Shifts Arising from Changes in Investment↔An event that causes firms to invest more at a given price level (optimism about the future, a fall in interest rates due to an increase in the money supply) shifts the aggregate-demand curve to the right. An event that causes firms to invest less at a given price level (pessimism about the future, a rise in interest rates due to a decrease in the money supply) shifts the aggregate-demand curve to the left.
  • Shifts Arising from Changes in Government Purchases↔An increase in government purchases of goods and services (greater spending on defense or highway construction) shifts the aggregate-demand curve to the right. A decrease in government purchases on goods and services (a cutback in defense or highway spending) shifts the aggregate-demand curve to the left.
  • Shifts Arising from Changes in Net Exports↔An event that raises spending on net exports at a given price level (a boom overseas, speculation that causes a currency depreciation) shifts the aggregate-demand curve to the right. An event that reduces spending on net exports at a given price level (a recession overseas, speculation that causes a currency appreciation) shifts the aggregate-demand curve to the left.
• Why Does the Short-Run Aggregate-Supply Curve Slope Upward?
  • The Sticky-Wage Theory↔An unexpectedly low price level raises the real wage, causing firms to hire fewer workers and produce a smaller quantity of goods and services.
  • The Sticky-Price Theory↔An unexpectedly low price level leaves some firms with higher-than-desired prices, depressing their sales and leading them to cut back production.
  • The Misperceptions Theory↔An unexpectedly low price level leads some suppliers to think their relative prices have fallen, inducing a fall in production.
• Why Might the Short-Run Aggregate-Supply Curve Shift?
  • Shifts Arising from Changes in Labor↔An increase in the quantity of labor available (perhaps due to a fall in the natural rate of unemployment) shifts the aggregate-supply curve to the right. A decrease in the quantity of labor available (perhaps due to a rise in the natural rate of unemployment) shifts the aggregate-supply curve to the left.
  • Shifts Arising from Changes in Capital↔An increase in physical or human capital shifts the aggregate-supply curve to the right. A decrease in physical or human capital shifts the aggregate-supply curve to the left.
  • Shifts Arising from Changes in Natural Resources↔An increase in the availability of natural resources shifts the aggregate-supply curve to the right. A decrease in the availability of natural resources shifts the aggregate-supply curve to the left.
  • Shifts Arising from Changes in Technology↔An advance in technological knowledge shifts the aggregate-supply curve to the right. A decrease in the available technology (perhaps due to government regulation) shifts the aggregate-supply curve to the left.
  • Shifts Arising from Changes in the Expected Price Level↔A decrease in the expected price level shifts the short-run aggregate-supply curve to the right. An increase in the expected price level shifts the short-run aggregate-supply curve to the left.