Aggregate Demand Curve

-Changes in the price level cause a move along the curve
Demand by consumers, businesses, government, and foreign countries.


AD Downward Sloping because-

Real Balance Effect: 

• higher price levels reduce purchasing power 
• this decreases the quantity of expenditures
• lower price levels increase purchasing power and increase expenditures 

Interest Rate Effect:

• when price level increases, lenders need to charge higher rates to get a REAL return on their loans
• higher interest rates discourage consumer spending and business investment 

Foreign Trade Effect:

• when US price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods
• exports fall and imports rise causing all real GDP demanded to fall

Shifters of Aggregate Demand:

• 2 parts in a shift in AD

          - A change in C, Ig, G, and/or Xn 

          - A multiplier effect that produces a greater change than the original in the four                         components  

• Increase = to the right 
• Decrease = to the left 

Determinants of AD:

• Consumption

          -Household Spending affected by:

                 - consumer wealth

                      - more income = more spending; Ad shifts right

                      - less income = less spending; AD shifts to the left

                 - consumer expectations

                     - positive expectations = more spending; AD shifts right

                     - negative expectations = less spending; AD shifts to the left

                 - household indebtedness

                     - less debt = more spending; AD shifts right

                     - more debt = less spending; AD shifts to the left

                 - taxes

                     - less taxes = more spending; AD shifts right

                     - more taxes = less spending; AD shifts to the left 

• Gross Private Domestic Investment

          -Investment Spending sensitive to:

                 - Real Interest Rate

                    - lower rate = more investment; AD shifts right

                    - higher rate = less investment; AD shifts to the left

                 - Expected Returns

                    - higher returns = more investment; AD shifts right

                    - lower returns = less investment; AD shifts to the left

                     - Influenced by:

                        - future expectations of a profit

                        - technology

                        - degree of excess capacity

                        - business taxes

• Government Spending

          - more spending = AD shifts right

          - less spending = AD shifts to the left 

• Net Exports

          - Exchange Rates

                - stronger $ = more imports, less exports; AD shifts to the left

                - weaker $ = less imports, more exports; AD shifts right

   

          - Relative Income

                - strong foreign economy = more exports; AD shifts right 

                - weak foreign economy = less exports; AD shifts to the left