AGGREGATE DEMAND

Aggregate demand curve

(Insert graph)

AD is the demand by consumers, businesses, governments, and foreign countries

What definitely doesn't shift the curve?

-changes in the price level cause a move along the curve

Why does AD downward sloping

1. REAL BALANCE EFFECT

-higher power levels reduce the purchasing power of money

-the decreases the quantity of expenditures 

-lower price levels increase purchasing power and increase expenditures

2. INTEREST RATE EFFECT

- when the price level increases, lenders need to charge higher interest rate to get a REAL on their loans

-Higher interest rates discourage consumer spending and buisness investment

3. FOREIGN TRADE EFFECT

-When U.S price level rises, foreign buyers purchase fewer U.S goods and Americans buy foreign goods

-Exports fall and import rise causing real GDP demanded to fall. (Xn, Decreases)

SHIFTERS OF AGGREGATE DEMAND

GDP = C + 1 + G + Xn

-change in C, Ig, G and Xn

-Multiplier effect that produces a greater change than the originial change in the 4 components

Increases in AD = AD ->

Decreases in AD = AD <-

CONSUMPTION

Household is effected by

Consumer wealth

-more wealth = more spending (AD >)

-less wealth = less spending (AD <)

Consumer expectations

- positive expectations = more spending (AD >)

-negative expectations = less spending (AD <)

Household indebtedness

-more debt = less spending (AD <)

-less debt = mores spending (AD >)

Taxes

- less taxes = more spending (AD >)

-more taxes = less spending (AD <)

Gross private investment

Investment spending is sensitive to

Real interest rate

-lower real interest rate = (less AD >)

-higher real interest rate = (less AD <)

Expected returns

-Higher Expected Returns= more investment (AD >)

-Lower Expected Returns = less investment ( AD <)

-Expected Returns are influenced by

-expectations of future probability 

-technology

-degree If excess capacity [Existing stock of capital]

-Business Taxes

Government spending 

-more government spending (AD >)

-Less government spending (AD <)

Net exports

-sensitive to 

Exchange rates (international value of $)

-Strong $ = more imports and fewer exports (AD <)

-Weak $ = fewer imports and more exports (AD >)

Relative income

-strong foreign countries = more exports = (AD >)

-weak foreign countries = more exports = ( AD <)