ECN 204 Lecture 8: Lecture 8.docx
Document Summary
The general level of prices directly determines the purchasing power of money. Real-balances effect: the inverse relationship between the price level and the real value (or purchasing power) of financial assets with fixed money value. Interest-rate effect: the direct relationship between the price level and the demand for money, which affects interest rates, and, as a result, total spending in the economy. An economy operating below its full-employment output has idle capital and labour little upward pressure on production costs. When the economy is operating beyond its full-employment output, most available resources are already employed per-unit production costs increase as economy expands: determinants of aggregate supply, 1. For any initial increase in ad, the resulting increase in real output will be smaller the greater is the increase in the price level: decrease in ad. Deflation is a rarity in the canadian economy. Real output takes the full brunt of the decline in ad because product prices are.