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Chapter 12
Chapter 12
Chapter 12
At each point along the AD curve, both the money market and the goods market are
in equilibrium.
Each point on the AS curve represents the price/ output decisions of all the firms in
the economy.
P0 and Y0 correspond to equilibrium in the goods market and the money market and
to a set of price/output decisions on the part of all the firms in the economy.
The Aggregate Demand (AD) Curve:
Planned Aggregate Expenditure and the Interest Rate:
We can summarize the effects of a change in the interest rate on the
equilibrium level of output in the goods market. The effects of a change in the
interest rate include:
■ A high interest rate ( r ) discourages planned investment ( I ).
■ Planned investment is a part of planned aggregate expenditure ( AE ).
■ Thus, when the interest rate rises, planned aggregate expenditure ( AE ) at every
level of income falls.
■ Finally, a decrease in planned aggregate expenditure lowers equilibrium output
(income) (Y) by a multiple of the initial decrease in planned investment.
Planned Investment: