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APMac U3 L1 aggregate demand and multiplier

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Define (using graphs as appropriate) the aggregate demand (AD) curve.

Explain (using graphs as appropriate) the slope of the AD curve and its determinants.

Define the expenditure multiplier, the tax multiplier, the marginal propensity to consume, and the marginal propensity to save.

Explain how changes in spending and taxes lead to changes in real GDP.

Calculate how changes in spending and taxes lead to changes in real GDP.

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Economists use the aggregate demand–aggregate supply model to represent the relationship between the price level and aggregate output in an economy and to illustrate how output, employment, and the price level respond to macroeconomic shocks.

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The aggregate demand (AD) curve describes the relationship between the price level and the quantity of goods and services demanded by households (consumption), firms (investment), government (government spending), and the rest of the world (net exports).

The negative slope of the AD curve is explained by the real wealth effect, the interest rate effect, and the exchange rate effect.

Any change in the components of aggregate demand (consumption, investment, government spending, or net exports) that is not due to changes in the price level leads to a shift of the AD curve.

A $1 change to autonomous expenditures leads to further changes in total expenditures and total output.

The expenditure multiplier quantifies the size of the change in aggregate demand as a result of a change in any of the components of aggregate demand.

The tax multiplier quantifies the size of the change in aggregate demand as a result of a change in taxes.

The expenditure multiplier and tax multiplier depend on the marginal propensity to consume.

The marginal propensity to consume is the change in consumer spending divided by the change in disposable income. The sum of the marginal propensity to consume and marginal propensity to save is equal to one.

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Did you want to post this answer after the video "Why Governments Create Inflation"? The video says that there is "sometimes a positive effect in the short run", which means that if you only look at the short run andnot take into account what happens after, you will see an increase in Y, and that, taken in isolation, is a good thing. But it also says that when inflation decreases, the first variable to adjust is output, not price, which means that after money supply-induced booms, there will be a bust. So Cowen and Tabarrok might agree with you that a SR stimulus is not a good thing overall. And for what it's worth I tend to agree with you as well. Even when there is general demand for money (when people desire to keep a greater proportion of their income available in their pockets) a money injection may not be the best response. Money injections are always localized in particular places to particular agents in the economy and this will always change relative prices and thus, distort the price signals. Money demand is usually a signal that the interest rates offered by banks are not high enough to induce savings. So, instead of arguing for money injections, we might simply want to wait for the rate of interest to increase.
On the other side of the debate you have the argument that when the money demand increases, and so, when people buy fewer goods than before, suppliers of goods are confused and their first response might be to decrease their output rather than decrease prices. Money injections might prevent this recession.
I think you are also right that governments have a hard time decreasing inflation. But there are exceptions. We know that during two successive mandates Ronald Reagan decreased the inflation (price level) rate more than two times. And Ludwig Erhard in 1948 in Germany managed to decrease the money supply (amount of currency in circulation) about two times in a shorter period of time.

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Intro to Business Fluctuations | Marginal Revolution University

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Did you want to post this answer after the video "Why Governments Create Inflation"? The video says that there is "sometimes a positive effect in the short run", which means that if you only look at the short run andnot take into account what happens after, you will see an increase in Y, and that, taken in isolation, is a good thing.

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The aggregate demand- aggregate supply model, or AD-AS model, can help us understand business fluctuations. We'll start exploring this model by focusing on the aggregate demand curve.

The aggregate demand curve shows us all of the possible combinations of inflation and real growth that are consistent with a specified rate of spending growth. The dynamic quantity theory of money (M + v = P + Y) can help us understand this concept. Let's recap the variables:

v = growth in velocity (or how quickly a dollar changes hands)

P = growth rate of prices ( inflation)

Y = growth rate of real GDP

If we rewrite the equation slightly to M + v = inflation + real growth, you can think of the left side as "spending growth."

Now let's try out an example scenario. Suppose the growth of the money supply has been 5% and the growth in velocity has been 0%. If real GDP growth has been at 0%, you'll get 5% + 0% = inflation + 0%. To make the sides equal, inflation must be 5%. This is one combination of inflation and real growth that is consistent with the spending growth of 5%. But there are many other possible combinations. For example, if real growth had been 3% instead of 0%, inflation would be at 2%.

Try plotting these points on a graph with inflation on the y-axis and real growth on the x-axis and connect them with a line. You're drawing an aggregate demand curve!

Put simply, the aggregate demand curve connects all of the points on a graph that show us all of the possible combinations of inflation and real growth that are consistent with spending growth.

You can think about spending growth another way, too. It's actually the equivalent of nominal GDP growth. If nominal GDP growth is 5%, an AD curve shows all of the possible combinations of inflation and real GDP growth that add up to 5% nominal GDP growth. Likewise, if nominal GDP growth is 7%, the AD curve will show all of the possible combinations of inflation and real GDP growth that add up to 7%, and so on. Increases in the growth rate of nominal GDP shift the aggregate demand curve outwards, whereas decreases shift it inwards.

Up next, we'll combine our new knowledge on the AD curve with the long-run aggregate supply curve.

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The Aggregate Demand Curve | Marginal Revolution University

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The aggregate demand- aggregate supply model, or AD-AS model, can help us understand business fluctuations. We'll start exploring this model by focusing on the aggregate demand curve. The aggregate demand curve shows us all of the possible combinations of inflation and real growth that are consistent with a specified rate of spending growth.

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1. What is aggregate demand, and how is it related to gross domestic product?

2. Why is aggregate demand a downward sloping curve, demonstrating an inverse relationship between price level and aggregate output?

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APMac Unit 3 Lesson 1 - Aggregate Demand Flashcards | Quizlet

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Start studying APMac Unit 3 Lesson 1 - Aggregate Demand. Learn vocabulary, terms, and more with flashcards, games, and other study tools.