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AD CURVE: The aggregate demand curve, which is a graphical representation of the relation between aggregate expenditures on real production and the price level, holding all ceteris paribus aggregate demand determinants constant. The aggregate demand, or AD, curve is one side of the graphical presentation of the aggregate market. The other side is occupied by the aggregate supply curve (which is actually two curves, the long-run aggregate supply curve and the short-run aggregate supply curve). The negative slope of the aggregate demand curve captures the inverse relation between aggregate expenditures on real production and the price level. This negative slope is attributable to the interest-rate effect, real-balance effect, and net-export effect.

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Lesson 1: Economic Basics | Unit 3: The Economy Page: 8 of 18

Topic: A Mixed Economy: Markets and Government <=PAGE BACK | PAGE NEXT=>

Markets do an effective (and efficient) job of answering the three questions of allocation--most of the time.
  • Markets are the VOLUNTARY exchange of goods and services.
  • A pure market economy is an economy that uses nothing but markets to allocate resources.
  • A pure market economy is a useful theoretical benchmark.
Market responses to the allocation questions:
  • What? Resources are used to produce goods with the highest prices.
  • How? Goods are produced using the combination of resource with the lowest prices.
  • For Whom? People with more income buy more goods.

Government also helps answer the three questions of allocation.
  • Government allocation is INVOLUNTARY. It sets the laws and rules.
  • A pure command economy is an economy that uses nothing but government to allocate resources.
  • A pure command economy is another useful theoretical benchmark.
Government responses to the allocation questions:
  • What? When government spends taxes, it dictates what goods will be produced.
  • How? Government has laws and rules that specify how resources will be used to produce goods.
  • For Whom? Government collects taxes from some people and distributes them among other people.

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COMPARATIVE STATICS

The technique of comparing the equilibrium resulting from a change in a determinant, or shock to a model, with the equilibrium that existed prior to the change. Comparative statics is the primary analytical technique used in the study of economics.

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Today, you are likely to spend a great deal of time driving to a factory outlet trying to buy either a package of blank rewritable CDs or yellow cotton balls. Be on the lookout for fairy dust that tastes like salt.
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Post WWI induced hyperinflation in German in the early 1900s raised prices by 726 million times from 1918 to 1923.
"Man is born to live, not to prepare for life. "

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