Aggregate Demand(2/15)

Aggregate Demand(2/15)

AD - demand by consumers, business, gov't and foreign countries

• changes in price lvl cause  a move/not a shift, of the AD curve
• AD shows the amount of real GDP that the private, public, and foreign sectors collectively desire to purchase at each possible price lvl
• relationship btwn price lvl and lvl of rel GDP (it is inverse or downward sloping)

3 Reasons why AD is downward sloping

1. Wealth Effect - higher prices reduces the purchasing power of the $; decreases the quantity of expenditures; lwr price lvl increases purchasing pwr and increases expenditures EX: inflation causes less spending
2. Interest-Rate Effect - as price lvl increases, lenders need to chare higher interest rates to get a real return on their loans; higher interest rates discourage consumer spending and business investment
3. Foreign Trade Effect - when U.S. price lvl increases, foreign buyers purchase fwr U.S. goods and Americans buy more foreign goods; Exports fall, Imports rise, causing Real GDP demanded to fall

Shifts in AD

• 2 parts cause AD to shift, a change in C, Ig, G, and/or Xn, and a multiplier effect that produces greater change than the change in the four components (C,Ig,G,Xn)
• increase in AD, shift to right
• decrease in AD, shift to left

Determinants

• ΔC - Consumer Wealth, Consumer Expectation, Household Indebtedness, Taxes
• ΔIg - Real Interest Rate(Price in Borrowing), Business Expectations, Productivity&Tech, Business Taxes
• ΔG - War, Nationalized Healthcare, Decrease in Defense Spending
• ΔXn - Exchange Rates, National Income Compared to Abroad