(2-12-16) Unit III Aggregate Demand

Aggregate Demand (AD)

Aggregate Demand (AD) - is the demand by consumers,businesses, government, and foreign countries.

What definitely doesn't shift the curve?

-changes in price level causes a move along the curve

Why is AD downward slopping?
1. Real-Balance Effect-Higher Price level-> Less purchasing power of money ($)

2. Interest-Rate Effect- Higher Price level->Higher interest rates -> Less spending & investment

3.Foreign Trade Effect-US price level increase->Foreign buyers buy less US goods and Americans buy foreign goods.


Determinants of AD
-Shifts = Expenditure of GDP: Change in C,G, Ig, Xn.; Multipliers that produce greater change than the original 4
-AD [up] = Rightward shift -AD [down] = Leftward shift
-Consumption
Affected by: Consumer Wealth- Rich(higher)=rightward Poor(lower) = Leftward
Consumer Expectations-Positive=Right Negative=Left
Household Indebtedness-Less=Right More=Left
Taxes- Less=Right More=Left
-Gross Private Investment
Affected by: Real Interest rate-Lower=Right Higher=left
Expected Returns-Higher=Right Lower=left
-Influenced by:Profit Expectations, Technology, Degree of excess capacity, and Business taxes
-Government Spending
More= Rightward shift
less= Leftward shift
-Net Exports
Affected by: Relative income- Strong foreign econ.-More Exports=Right Weak foreign econ.-Less Exports=Left
Exchange rates-Strong $=More imports=Left Weak $=Less Imports=Right