Aggregate Demand Curve

Aggregate Demand Curve

- graph for aggregate demand curve does not contain numbers and is based on determinants
- "output" is considered the same as "quantity"

Aggregate Demand; AD

AD= demand by consumers, businesses, government and foreign countries; C+I+G+XN
- change in price level cause a move along the curve not a shift of a curve
- AD shows the amount of real GDP that private, public and foreign sector collectively desire to purchase at each price level.
- AD is the relationship between the price level and level of real GDP; it is an inverse relationship

3 Reasons why it's a downward slope

1. The wealth effect
higher price = purchasing power (how much you are able or willing to pay) decreases
lower price = increases expidentures
2. Interest-Rate Effect 
"Interest" is the cost of doing business
if price level increases = lenders charge higher
higher interest rates discourage consumer spending & business investment
3. Foreign Trade Effect
US prices go up = foreign buyers purchase less; US buys more from foreigners

Shifts in Aggregate Demand

2 shifts occur
1. C, I, G, XN - graph affected when one of these changes
2. multiplier effect - no graph - produces a greater change than the original 4 components

INCREASE IN AD = AD TO THE RIGHT

DECREASE IN AD = AD TO THE LEFT

Increase in AD

- Tell what happens in equilibrium 

Decrease in AD

Determinants of AD

- net exports (Xn) = exports - imports
- consumption (C)
- gross private investment (Ig)
- government spending (G)

AD = GDP = C + G + Ig + XN

C - Change in consumer spending
- expectations (fear of recessions)
- consumer wealth (boom in stock)
- household debt (more consumer debt)
- taxes (decrease in income taxes)

Ig - Changes in investment spending
- real interest rates (price of borrowing)
- future business expectations (high expectations)
- productivity / technology (new robots)
- business taxes (high corporate tax means)

G - Government spending
- war
- health care
- defense spending
- net exports (every nation depends on the US)
- exchange rates
- more government spending = AD/GDP to the RIGHT
- less government spending = AD/GDP to the LEFT