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Chapter 6 The Aggregate Market<br />

The three macroeconomic goals are price level stability, full employment, and economic growth.<br />

The macroeconomic measurements of these goals are price level, unemployment rate, and Real<br />

GDP. Price level, unemployment rate, and Real GDP are determined by the interaction of total<br />

spending and total production in the overall economy (aggregate market).<br />

In Chapter 3, we saw that the equilibrium price and the equilibrium quantity for an individual good<br />

(like donuts) are determined by demand and supply in the market for that good. In the overall<br />

economy, the equilibrium price level and the equilibrium quantity of Real GDP are determined by<br />

aggregate demand and aggregate supply in the aggregate market.<br />

Aggregate Demand<br />

In the aggregate (overall) market, the demand side of the market is called aggregate demand.<br />

Aggregate demand – the quantity demanded of all goods and services at different price levels.<br />

The aggregate demand curve (AD) indicates an inverse relationship between the price level and<br />

the quantity demanded of Real GDP. This inverse relationship results in a downward sloping AD<br />

curve, as illustrated on the aggregate market graph below. (For an explanation of why the AD<br />

curve is downward sloping, see the appendix at the end of the chapter.)<br />

Price<br />

Level<br />

Real GDP<br />

Shifts in the Aggregate Demand Curve<br />

The aggregate demand curve shifts in response to a change in Total Expenditures. An increase<br />

in Total Expenditures will cause an increase in aggregate demand (the AD curve shifts to the<br />

right). A decrease in Total Expenditures will cause a decrease in aggregate demand (the AD<br />

curve shifts to the left). As explained in Chapter 5, Total Expenditures consists of four types of<br />

spending; consumption, investment, government purchases, and net exports. The factors that<br />

affect each of these four types of spending are discussed below:<br />

1. Consumption. Consumption spending is affected by;<br />

FOR REVIEW ONLY - NOT FOR DISTRIBUTION<br />

a. Wealth. An increase in household wealth will lead to an increase in consumption. A<br />

decrease in household wealth will lead to a decrease in consumption.<br />

AD<br />

6 - 1 The Aggregate Market

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