Aggregate Demand -

Aggregate Demand - 


  • Aggregate Demand
    • x-axis: real GDP 
    • y-axis: price level
    • no numbers
    • AD is demanded by consumers, businesses, government, and foreign countries
    • changes in the price level cause a move along the curve not a shift of the curve 
    • AD = C + Ig + G + Xn



  • Aggregate Demand (AD)

    • shows the amount of real GDP that the private public, and foreign sector collectively desire to purchase at each possible price level
    • the relationship between the price level and the level of real GDP is inverse



  • Why is AD downward sloping?

    • wealth effect
      • higher prices reduce purchasing power of $
      • this decreases the quantity of expenditures
      • lower price levels increase purchasing power and increase expenditures
      • ex: if the balance in your bank was 50k but inflation erodes your purchasing power, you will likely reduce your spending
    • Interest Rate Effect:
      • as price level increases, lenders need to charge higher interest rates to get a REAL return on their loan
      • buy low, sell high
      • interest is the cost of doing business
      • higher interest rates discourage consumer spending and business investments
      • ex: increase in prices leads to an increase in interest rate from 5% to 25%. You are less likely to take out loans to improve your business
      • Result: price level goes up, GDP demanded goes down (and vise versa)
    • Foreign Trade Effect:
      • When U.S price level rises, foreign buyers purchase fewer U.S goods and Americans buy more foreign goods
      • exports fall and imports rise causing real GDP demanded to fall (Xn increases)
      • ex: if price triple in the US, Canada will no longer buy US goods causing quantity demanded of US products to fall 
    • Shifts in Aggregate Demand
      • two parts:
        • expenditure approach
        • a multiplier effect that produces a greater change than the original change in the four components
      • increase in AD = AD goes to the right
      • decrease in AD = AD goes to the left 
    • Determinants:
      • Consumption (G)
        • change in consumer spending
        • consumer wealth (Boom in stock market)
        • consumer expectations (people fear recession)
        • household indebtedness (more consumer debt)
        • taxes (decrease in income taxes)
      • Gross Private Investment (Ig)
        • change in government spending
        • real interest rates (price of borrowing $. if interest rates increase/decrease...)
        • future business expectations (high expectations)
        • productivity and technology (new robots)
        • business taxes (higher corporate taxes mean...)
      • Government Spending (G)
        • change in government spending 
        • war
        • nationalized health case
        • decrease in defending spending
      • Net Exports (Xn)
        • change in net exports
        • exchange rates (if US dollars depreciates relative to the euro)
        • national income compared to abroad (if a major importer has a recession...) (if the US has a recession)
        • 'If the US gets a cold, Canada gets pneumonia'
        • AD = GDP = C + Ig + G + Xn
    • Government Spending
      • more government spending (AD increases)
      • less government spending (AD decreases)






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