February 15, 2017

Aggregate Demand curve

• AD is demand by consumers, businesses, government and foreign countries
• changes in price level cause move along curve not shift on curve
• inverse relationship between price level and level of RGDP

3 reasons why AD downward sloping

• wealth effect

• higher prices reduce purchasing power of $
• decreases quantity of expenditures
• lower price level increase purchasing power and increase expenditures

• interest rate effect

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

• Foreign trade effect

• When U.S, price level increases, foreign buyers purchases fewer U.S. goods and americans buy more foreign goods
• exports fall and imports rise causing RGDP demanded to fall. (Xn decreases)

Shift in AD

• 2 parts to shift in AD
• A change in GDP
• multiplier effect that produces greater change than original change in 4 component
• Increases in AD=AD →
• Decrease in AD=AD ←   
  

4 determinates of AD

• GDP: C, IG, G, Xn
• Change in investment spending
• real interest rates (price of borrowing $)
• (if interest rate increases/decreases)
• future business expectations (High expectations)
• productivity and technology (new robots)
• business taxes (higher corporate taxes mean)
• Change in government spending
• war, nationalized health care, decrease defense spending
• change in net exports
• exchange rates
• if U.S, dollar depreciates relative to euro
• national income compared abroad
• if major importer has a recession
• AD= GDP
• Government spending
• more govt spending AD →
• less govt spending AD ←