Aggregate Demand

February 16, 2017

Three reason why AD downward sloping

     Wealth Effect 
Higher prices reduce purchasing power of $      
This decreases the quantity of expenditures
 Lower price levels increase purchasing power and increase expenditures

      Interest-rate effect
As price levels increase, lenders need to charge higher interest rates to get a real return on their loan
Higher interest rates discourage consumer spending the business investments

     Foreign Trade Effect
When U.S price level rises, foreign buyers purchase fewer U.S goods and Americans buy more foreign goods
Exports fall and imports rise casing real GDP demanded to fall. ( X_n Decrease)


Shifts in Aggregate Demand
      There are two parts to a shift in AD
      change in C, I_g , G and/ X_n
           multiplier effect that produces a greater change than the original change in the 4 components

Increase in AD = AD increase
Decrease in AD= AD decrease


      
Determinant of AD
 Consumption C

 Consumer wealth( boom in the stock market

 Consumer expectations (recession)
Household indebtedness (more consumer debt)

Taxes

 Change in Investment Spending

    Real interest Rate ( price borrowing money)
    Future Business Expectations ( high expectations)
 Productivity and technology
 Business Taxes

    Change in government Spending
   War / Nationalized Health care / Decreased in defense spending

 Change on Net Exports (X-M)
   Exchange rates ( different currency)
 National Income compared to Abroad
 If a major importer has a recession

 Government Spending
 More government spending (AD to the right)
 Less government Spending (AD to the left)

VIDEO ABOVE TO TEACH OVER THE LESSON JUST DISCUSSED!!!!!