Aggregate Demand

Change in price level doesn't shift the curve, it causes a move along the curve


Why is AD downward slopping?
1. Real- Balance- Effect
Higher price levels reduce the purchasing power of money
This decreases the quantity of expenditures
Lower price levels increases purchasing power and expenditures
Ex: The balance in your bank was $50,000 but inflation erode you're purchasing power  which will cause you to then reduce your spending

2. Interest Rate Effect:
What price level increases lenders need to charge higher interest rates to get  a real return on their loans
Higher interest rates discourage consumer spending and businesses investments

3. Foreign Trade Effect
When US price level rises foreign buyers purchase fewer US goods  and Americans buy more foreign goods
Exports fall imports rise causing real GDP demanded to fall ( XN decreases)

Shifters of Aggregate Demand
GDP=C + I+G+XN

Two parts to shift and AD:
Change in C,IG, G and/ or XN
Multiplier fact that produces a greater change than the original change in the 4 components
Increase in AD= AD shift to the right
Decrease in AD= AD shift to the left

Consumption:
Household spending is affected by-
-Consumer wealth: more wealth= more spending ( AD shifts to the right)
Less wealth= less spending (AD shifts to the left)
- Consumer expectations:
Positive- more spending ( AD shifts to the right)
Negative- less spending (AD shifts to the left)
- Household indebtedness
Less debt = more spending ( AD shifts to the right)

Gross private investment:
Investment spending is sensitive to:
-Real interest-rate
Lower real interest rates =  More Investment (AD shifts to the right)
Higher real interest rates = Less investment ( AD shifts to the left)
- Expected Returns
Higher expected returns = More Investment ( AD  shifts to the right)
 Lower expected returns=  Less investment ( AD  shifts to the left)

 Expected returns are influenced bye...
-  expectations of future profitability
-  Technology
-  degree of excess capacity (existing stock of capital)
-  Business Taxes

 More government spending (AD  shift to the right) Increase
 Less government spending ( AD  shifts to the left )  decreases Decrease

 Net exports:
 Net exports are sensitive to
-  Exchange rates  (  International value of $)
Strong $= more imports and fewer exports= (AD  shifts to the left )
Weak $ =  fewer imports and more exports = (AD  shifts to the right )
-  Relative Income
 Strong foreign economies =  more exports = (AD  shift to the right )
 Week foreign economies =  les exports = (AD  shifts to the left )