Chapter 14 Summary - EKN120

EKN 120

Chapter 14: The Keynesian Cross
AD-AS Model
 The AD-AS Model is a way of illustrating national income determination and changes in the
price level
 It explains price level and output through the relationship of AD and AS
 Movements of AD and AS curves can be used to predict the effects that various exogenous
events will have on real GDP and the price level
 Why does the AD slopes downward?
o Real-balances effect
o Interest rate effect
o Foreign purchases effect
 AD= Aggregate Demand: A schedule or curve that shows the total quantity of goods and
services demanded at different price levels
 AS= Aggregate Supply

Changes in Aggregate Demand
 AD Formula = C + I + G + (X-M)

The Aggregate Demand Curve Inverse Relationship




 Real balances effect: The tendency for increases in the price level to lower the real value of
financial assets with fixed money value and, as a result, to reduce total spending and real
output, and conversely for decreases in the price level
 Interest rate effect: The tendency for increases in the price level to increase the demand for
money, raise interest rates, and as a result, reduce total spending and real output in the
economy
 Foreign purchase effect: The inverse relationship between the net exports of an economy
and its price level relative to foreign price levels
 This is why the Ad curve is downward sloping

Determinants of AD and multiplier effect
 Changes in consumer spending