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November-24-08
8:21 AM
Aggregate Demand - the relationship between the general price level and total spending in the
economy. - made up of spending by C, I, G, and (X-M).
Real Expenditure - total spending in an economy, adjusted for changes on the general price level, is
calculated by using the GDP deflator
Price Level
Real GDP
Demand Curve - relationship between the general price level and total spending in the economy
expressed on a graph
Demand Schedule - shows relationships between general price level and total spending in the economy
expressed in a table
1. Wealth Effect: - when price level rises, the real value of households financial assets decreases. Because
consumers feel they have less wealth, they spend less on consumption items. As a result of this wealth
effect, real expenditures drop
Real Value of Financial Assets = Nominal value financial assets / price level
2. Foreign Trade Effect - with changes in the price level, expenditures on imports change in the same
direction, while expenditures on exports change in the opposite direction.
a. When the price level in Canada rises, Canadian exports become more expensive for foreigners -
sales in foreign markets fall - decreasing in export expenditures.
b. Products imported into Canada become cheaper relative to higher- priced domestic products -
import expenditures by Canadian rise.
c. Foreign Trade Effect - Net exports (X-M)
1. Consumption
a. Disposable income
b. Wealth (wealth effect)
3. Government Purchases
4. Net Exports
5. Foreign Incomes (FDI)
6. Exchange Rates
Aggregate demand increases and the AD curve shifts to the right, with the following:
Aggregate demand decreases and the AD curve shifts to the left with the following: