Aggregate Demand

Aggregate Demand

• Aggregate Demand - Demand by consumers, businesses, government, and foreign countires
• Change in price = Move along curve
• AD = C + I + G + Xn
• The curve is a downward slope because:
1. Real Balance Effect: Higher price -> Less purchase power of $
1. Reduced quantity of expenditures
2. Lower price levels -> Higher purchase power and expenditures
2. Interest Rate Effect: Higher price level -> Higher interest rates -> Less spending & investment
3. Foreign Trade Effect: US price level increase -> Foreign buyers buy less U.S and Americans buy foreign.

Determinants of AD

• Shifters = Expenditure approach of GDP
• Includes
• Change in C, I, Ig, Xn
• Multiplier that produces greater change than original in 4 comp.
• AD up = Right  :  AD down = Left
• Consumption: Affected by-
• Consumer Wealth - Right if more; Left if less
• Consumer Expectations - Positive goes right; Negative goes left
• Household Indebtedness - Right if less; Left if more
• Taxes - Right if less; Left if more
• Gross Private Investment: Affected by:
• Real Interest Rate - Right if lower; Left if higher
• Expected Returns - Right if higher; Left if lower
• Influenced by: 
• Profit Expectations 
• Technology
• Degree of excess capacity
• Business taxes
• Government Spending:
• More leads to right
• Less leads to left
• Net Exports: Affected by - 
• Relative Income
• Strong foreign economy -> More exports -> Right
• Weak foreign economy -> Less exports -> Left
• Exchange rates
• Strong $ -> More imports; Fewer exports -> Left
• Weak $ -> Less imports; More exports -> Right