ECON 101 HELL WEEK BLOG REVIEW:
PART 1: DEMAND SIDE EXPENDITURE
PART 2: SUPPLY SIDE EXPENDITURE
PART 3: EQUILIBRIUM: PUTTING IT TOGETHER
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PART 1: DEMAND SIDE EXPENDITURE
We know that National Income is a function of Aggregate Expenditure. Thus far, we have been assuming that prices remain constant...
Newsflash! In real life, prices change (unless the firms contributing to GDP are monopolies, or they have excess capacity). We need to look at how this affects aggregate expenditure, and subsequently, national income.
We assume that output is demand-determined: that is, GDP will rise if general consumer demand rises, and it will fall with decreases in demand
OKAY: How does price affect aggregate demand? Well, it affects it in an inverse relationship. When the price level increases, aggregate expenditures shift down. When the price level decreases, aggregate expenditures shift up! Why?
