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THE MULTIPLIER MODEL AND THE AS/AD MODEL

THE MULTIPLIER MODEL AND THE AS/AD MODEL. Chapter 10 Appendix B. Aggregate Expenditures and Aggregate Demand. The aggregate demand (AD) curve shows the relationship between different price levels and different equilibria in the goods market.

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THE MULTIPLIER MODEL AND THE AS/AD MODEL

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  1. THE MULTIPLIER MODEL AND THE AS/AD MODEL Chapter 10 Appendix B

  2. Aggregate Expenditures and Aggregate Demand • The aggregate demand (AD) curve shows the relationship between different price levels and different equilibria in the goods market. • Changes in prices affect aggregate expenditures (AE) through the wealth, interest rate, and international effects. • If prices increase, aggregate expenditures decrease. • If prices decrease, aggregate expenditures increase.

  3. Deriving AD from AE AE AP C AE3 (P3) A Multiplier Effect P1 AE2 (P2) Initial Effect AE1 (P1) B' B Price Level B P2 C P3 A AD Y1 Y2' Y2 Y3 Y1 Y2 Y2' Real income Y3 Real income

  4. Spending Changes in AE and AD Models Aggregate production AE1 =2026 + 0.5Y Initial Effect Multiplier Effect $20 $20 AE2 =2006 + 0.5Y $20 $20 SAS AD0 AD1 $4,012 $4,052 $4,012 $4,032 $4,052 Real income Real income

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