Q1
Define Aggregate Demand and its 4 components
AD is the total demand for all final goods and services (spending).
AD = C + I + G + NX
AD Curve: The quantities of GDP purchasers are willing and able to buy at different price levels.
Define Aggregate Supply and distinguish the 2 AS curves
The supply of all final goods and services (producing)
LR: enough time for all prices to adjust; change in P does not change Y
SR: some prices haven't adjusted (wages)
First factor why the slope of AD is negative (hint: affects C)
Wealth Effect: An increase in the price level reduces the real value of wealth, which reduces the quantity of AD; affects C
Second factor why AD slopes down (affects I). Can you walk through an example?
Interest Rate Effect: when the price level goes up, you’re poorer in real terms, which means you save less (affects I).
Third factor why AD slopes down? Provide an example when the quantity of AD decreases.
International Trade Effect: exports become relatively more expensive and imports become relatively cheaper (affects NX)
If the price level in the U.S. rises and chocolate becomes more expensive, consumers will buy chocolate from abroad instead, increasing Imports and decreasing NX.