Chapter Two
Chapter two detailed trade, trade-offs, and government policy. The chapter also detailed graphs that explained slopes and linear curves. The most noticeable feature of the aggregate demand curve is that it is downward sloping, as seen below (Author Unknown, 2008). A downward sloping aggregate demand curve means that as the price level drops, the quantity of output demanded increases (Author Unknown, 2008). There are three basic reasons for the downward sloping aggregate demand curve. These are Pigou's wealth effect, Keynes's interest-rate effect, and Mundell-Fleming's exchange-rate effect (Author Unknown, 2008).
There is another major model that is useful for explaining the nature of the aggregate demand curve. This model is called the IS-LM model after the two curves that are involved in the model. The IS curve describes equilibrium in the market for goods and services where Y = C(Y - T) + I(r) + G and the LM curve describes equilibrium in the money market where M/P = L(r,Y).
Combining AD and AS Supply Curves (Author Unknown, 2008).
Chapter 33
Chapter 33 discussed the international financial policy. Fixed rate is what the government states what the currency will be worth (e.g. £1 will be worth $2). This is regardless of external factors. Floating/flexible rate is all about supply and demand. The more people buy into a currency, the more it will be worth. A strong currency is also a good indicator of a sound economy in some respects. Say for some reason (take high interest rates) an influx of "hot money" comes into the UK. The pound will become stronger and it will cost more to buy it, as there is a lower supply of it. How does the Financial Sector Assessment Program ...