UNIT 3: Aggregate Demand 2/18/16

Aggregate Demand is the summation of all the demand in one economy, prices move along the curve.
AD is affected by Consumption, Gross Investment, Government spending, and Net Exports



The demand slope always points downward for 3 reasons or effect: The Real Balance Effect (High prices means low purchasing power which leads to less quantity vice versa.), The Interest Rate Effect (An increase in price raises the interest rate, which lowers consumer spending), and the Foreign Trade Effect (If USA prices increase, it decreases foreign purchases, which decreases Xn or Net Exports)

AD is affected by two things, a change in GDP(C, Ig, G, Xn) or multiplier effect.
If AD decreases, it shifts left and if it increases, it shifts to the right.

Consumption: Determined 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: Determined 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: Determined by:

More; AD shifts right

Less; AD shifts left

Net Exports: Determined by:

Relative Income

Strong foreign economy leads to More exports; AD shifts Right

Weak foreign economy leads to Less exports; AD shifts Left

Exchange rates

Strong Dollar leads to More imports; Fewer exports AD shifts Left

Weak Dollar leads to  Less imports; More exports AD shifts Right