Mexico

Factors that change AGGREGATE DEMAND
* Macroeconomic Policies: such as fiscal and monetary policies.
* Exogenous Variables: such as foreign economic activity, technological advances, andshifts in assets markets.
-NOTE: when these variables change, they shift the AD curve (relate overall spending on all components of output to the overall price level, with policy and exogenousvariables held constant.
The aggregate demand curve is downward sloping because a higher price level reduces real income and real wealth.
The simplest approach to understanding business cycles is known asthe Keynesian multiplier model.
Multiplier model: it is a macroeconomic theory used to explain how output is determined in the short run. The name “multiplier” comes from the finding that eachdollar change in exogenous expenditures (such as investments) leads to more than a dollar change (or a multiplied change) in GDP.
Key assumptions underlying the multiplier model
* Wages & pricesare fixed
* There are unemployed resources in the economy.
The multiplier model analyzes how investment and consumption spending interact with incomes to determine national output, this iscalled the total expenditure approach.
Equilibrium level of national output occurs when planned spending equals planned output. Equilibrium output comes at the intersection of the total expenditure (TE= C + I + G) consumption plus investment schedule and the 45° line.
Multiplier: is the impact of a 1 dollar change in exogenous expenditures on total output.
Simple multiplier formula
CHANGE INOUTPUT = 1/ MPS * CHANGE IN INVESTMENT
= 1/ 1 – MPC * CHANGE IN INVESTMENT
Analysis of fiscal policy
* Elaborates the Keynesian multiplier model.
* Itshows that an increase in government purchases taken by itself, with taxes and investment unchanged has an expansionary effect on national output much like that of investment.
Government expenditure...