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AGGREGATE DEMAND
EXPANSION(boom)
Aneconomic expansionis an increase in the level
ofeconomic activity, and of the goods and services
available.
RECESSION
Arecessionis abusiness cyclecontraction. It is a
general slowdown in economic activity.
DEPRESSION
A depression is an unusual and extreme form of
recession
RECOVERY
Impact of recession
Investments fall sharply
Employment usually falls sharply
Business profits fall sharply
As output falls, inflation slows
AGGREGATE DEMAND
The total amount of goods and services demanded in
the economy at a given overall price level and in a
given time period.
Aggregate demand is the demand for the gross
domestic product (GDP) of a country.
Aggregate Demand (AD) = C + I + G + (X-M)
Aggregate demand
Real-Balances Effect
The real-balances effect refers to the real value of
money. The real value of money is determined by how
many goods and services each dollar will buy.
Periods of high inflation and/or high prices reduce your
ability to purchase goods and services. Periods of low
inflation and/or price reductions increase your ability
to purchase goods and services.
The real-balances effect then is dependent upon
changes in average prices. As inflation declines the
AD curve would shift to the right as more output is
consumed.
Foreign-Trade Effect
The foreign-trade effect refers to the relative price
of imports compared to the price of U.S. produced
goods.
If U.S. produced goods prices are rising, more imports
will be purchased. If U.S. produced goods prices are
falling, more domestic goods will be purchased.
Consumers in other countries also buy more U.S.
exports when the prices fall, and buy less when the
prices increase.
Interest-Rate Effect
Prices of goods and services tend to
affect the demand for money. As
prices fall, the demand for money is
lower. Why? Because goods and
services cost less, therefore less
borrowing is needed. When the
demand for money is lower, interest
rates fall.
Lower interest rates eventually
produce more borrowing to purchase
goods and services. This process is