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The demand curve shows the amount of goods consumers are willing to buy at each market price.
Qd = a b(P)
Q = quantity demand
a = all factors affecting price other than price (e.g. income, fashion)
b = slope of the demand curve
P = Price of the good.
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A change in any variable other than price that influences quantity demanded produces a shift in
the demand curve or a change in demand.
Population change
Consumer preferences
This demand curve has shifted to the right. Quantity demanded is now higher at any
given price.
The shift in the demand curve moves the market equilibrium from point A to point B,
resulting in a higher price and higher quantity.
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A change in any variable other than price that influences quantity supplied produces a
shift in the supply curve or a change in supply.
Increase in technology
1. Shortages (Qd > Qs When the price ceiling is below market price)
2. Reductions in product quality. (Sellers can evade the law by reducing quality
rather than raising price.)
3. Wasteful lines and other search costs. (if price is not allowed to rise, buyers
must compete in other ways, bribes, waiting in line)
4. A loss of gains from trade. (Profitable trades will not be made. This creates a
deadweight loss: the total of lost consumer and producer surplus when not all
mutually profitable gains from trade are exploited)
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Price Floor
1. Surpluses; (A minimum wage above the market price creates a surplus - the
quantity of labor supplied exceeds the
quantity demanded.
4. A misallocation of resources
GDP: Currency value of all final goods and services produced within a countrys borders
Nominal GDP: Currency value of all final goods and services produced within a countrys borders
without the inflation adjustment.
Real GDP: Currency value of all final goods and services produced within a countrys borders minus the
effects of inflation
Inflation: A general rise in the price level of an economy
Consumption: Dollar value of all goods and services purchased by households
Investment: Dollar value of all goods and services purchased by business for the purpose of using in
their business
Government Spending: Dollar value of all goods and services purchased by the various agencies of
Maldives.
Net Exports: Dollar value of all goods and services produced in the country and shipped to other
countries MINUS the value of the goods and services imported from other countries
Aggregate Demand: The amount of goods and services ALL buyers in the economy are willing/able to
buy at all the possible price levels
Aggregate Supply: The amount of goods and services ALL companies are willing to produce at ALL
possible price levels
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GDP Per Capita: Currency value of all final goods and services produced within a countrys borders
divided by the population
Imports: Goods and services produced in other countries, then brought to the Maldives in exchange for
currency
Exports: Goods and services produced in the Maldives, then sent to other countries in exchange for
currency
Standard of Living: Intangible concept that seeks to represent a countrys level of economic prosperity.
Correlates with GDP growth
Expenditures Approach
GDP = C + I + G + (X - M)
C = Personal Consumption in the economy:
The purchases of finished goods and services (but not houses)
I = Gross Private Business Investment monies:
Factory equipment maintenance,
New factory equipment,
Construction of housing,
Unsold inventory of products built in a year
G = Government Spending:
Government purchases of products and services
Xn = Net Foreign Factor of Trade: Exports minus Imports
Exports = Dollars in, Imports = Dollars out
Nominal GDP can change from time to time because of two reasons:
GDP _ Deflatort
NGDPt
100
RGDPt
Inflation Rate is The percentage increase in the price level from one year to the next
Anticipated changes are fully expected by economic participants. Decision makers have time to
adjust to them before they occur.
The aggregate demand (AD) curve indicates the quantity of goods and services that will be
demanded at alternative price levels.
An increase (decrease) in real wealth, interest rate, expected rate of inflation, higher
(lower) real incomes abroad, exchange rate value of the nations currency.
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The AD-AS model indicates that unanticipated changes will disrupt macro equilibrium and result
in economic instability.
During a recession, real resource prices will tend to fall because the demand for
resources will be weak and the rate of unemployment high.
During a boom, real resource prices will tend to rise because demand for resources will
be strong and the unemployment rate low.
Question Slide 3
The Law of Demand tells us that: "all else equal, when the price of a particular good falls, the quantity
demanded for that good rises."
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o
o
Measures the responsiveness in quantity demanded of one good to changes in the price of another
good.
= % QD of A
% P of B
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= % Q/Q
% Y /Y
o
E > 1 Superior Good
y
E = 1 Normal Good
y
x 100
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Inflation = (Price Index in Current Year Price Index in Base Year) * 100
Price Index in Base Year
Currency
Checking Deposits
Traveler's checks
M1,
Savings,
2. What is Money?
Money is anything of value that is widely accepted as payment for goods and
services
A medium of exchange:
An asset used to buy and sell goods and services.
A store of value:
An asset that allows people to transfer purchasing power from one period to
another.
A unit of account:
Units of measurement used by people to post prices and keep track of revenues
and costs
Commercial banks.
Banks play a central role in the capital market (loanable funds market):
They help to bring together people who want to save for the future with those who
want to borrow for current investment projects
In addition, three other factors are altering the nature of money and reducing the value of the
money growth figures as an indicator of monetary policy:
Keynesian analysis indicated that fiscal policy could be used to maintain a high level of output
and employment.
If total spending is less than full employment output, inventories will rise and firms will reduce
output and employment.
Keynesian theory highlights the potential of fiscal policy as a tool capable of reducing
fluctuations in AD.
A budget deficit is present when total government spending exceeds total revenue from all
sources.
A budget surplus is present when total government spending is less than total revenue.
When inflation is a potential problem, Keynesian analysis suggests fiscal policy should be more
restrictive:
Reduction in government spending
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Or increase in taxes
When an economy is operating below its potential output, the Keynesian economic model
suggests that fiscal policy should be more expansionary.
Increase in government purchases of goods & services
Or reduction in taxes
This means that somehow, what we produce supply all gets sold
Keynesians argued that the money supply did not matter much.
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u
While minor disagreements remain, the modern view emerged from this debate.
-- Modern Keynesians and monetarists agree
that monetary policy applies an important impact on the economy.
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