AGGREGATE DEMAND

AGGREGATE DEMAND

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Aggregate demand (AD) shows the amount of real GDP that the private, public, and foreign sector collectively want to purchase at each possible price level. It is the demand by consumers, businesses, government, and foreign countries. It changes in price level which causes movement along the curve, not a shift of the curve. The relationship between the price level and the level of real GDP is inverse. The formula for aggregate demand is:
AD = C + Ig + G + Xn

 The 3 reasons why aggregate demand is downward sloping are wealth effect, interest-rate effect, and foreign trade effect.

Wealth Effect
  • higher prices reduce the power of the dollar
  • this decreases the quantity of expenditures
  • lower price levels increase purchasing power and increase expenditures
Interest-Rate Effect
  • as 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 business investment
Foreign Trade Effect
  • when U.S. price level rises, foreign buyers buy fewer U.S. goods and Americans buy more foreign goods
  • exports fall and imports rise causing real GDP demanded to fall which makes Xn decrease
2 parts to a shift in aggregate demand are...:
  •  change in C, Ig, G, and/or Xn
  •  multiplier effect that produces a greater change than the original change in the 4 components
  • increases in AD = AD shifts to the right
  • decreases in AD = AD shifts to the left

 The determinants of aggregate demand are...:

  • consumption (C)
  • gross Private Investment (Ig)
  • government Spending (G)
  • net Exports (Xn) 
The changes in consumer spending happen because...:
  • consumer wealth 
  • consumer expectations 
  • household indebtedness
  • taxes 
Changes in investment spending happen because...:
  • real interest rates
  • future business expectations
  • productivity and technology 
  • business taxes 
Changes in government spending happen because...:
  • war
  • nationalized health care
  • decrease in defense spending
  • more government spending = AD shifts to the right
  • less government spending = AD shifts to the left
Changes in net exports happen because...:
  • exchange rates 
  • national income compared to abroad
    • if a major importer has a recession
    • if the U.S. has a recession
If you still dont understand, here are some vids 2 help :):



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