Page 81 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Now refer to the Figure 4.9 which also has two parts (c) and (d).
Figure 4.9

The upper part shows income determination at the intersection of AE and the 45° line. This is
0
before the change in P. The equilibrium is at E . The equilibrium income is Y with rise in P, both
0 0
C and I fall. This shift AE curve downwards from AE to AE . The new income equilibrium is at
0 1
E and income Y . Rise in P leads to fall in Y.
1 1
The lower part (part-d) shows the derivation of the AD curve. The overall price levels are shown
on the Y-axis. The income level is shown on the X-axis. Points A and B correspond to E and E .
0 1
Joining A and B we get the AD curve.
At every point along the AD curve aggregate quantity demanded is equal to equilibrium AE.
Each equilibrium AE on the AD curve is consistent with the equilibrium in the goods market
(upper part of the Figure 4.9) and the money market (part-'a' of the Figure 4.8). The AD curve is
downward sloping from left to right indicating inverse relation between P and Y.

When will AD Curve Shift?

AD curve assumes that G, T and Ms remain unchanged as we move along the curve. If any one of
these changes AD curve will shift.

Figure 4.10
Y
Overall
Price
Level

AD 1
AD 0
O Agg. Income X
(Y)

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