Unit Three: Aggregate Demand (Part Two)

Aggregate Demand

Notes from 2/12/16

Determinants of AD

1. Consumption: Household spending affected by-

1. Consumer Wealth 
1. More Wealth = More Spending = Shift → 
2. Less Wealth = Less Spending = Shift ←
2. Consumer Expectations
1. Positive Expectations = More Spending = Shift →  
2. Negative Expectations = Less Spending = Shift ←
3. Household Indebtedness
1. Less Debt = More Spending = Shift → 
2. More Debt = Less Spending = Shift ←
4. Taxes
1. Less Taxes = More Spending = Shift →  
2. More Taxes = Less Spending = Shift ←

2. Gross Private Domestic Product: Investment spending is sensitive to-

1. Real Interest Rate
1. Low Rate = More Investment = Shift → 
2. High Rate = Less Investment = Shift ← 
2. Expected Returns 
1. Higher Expected Rate = More Investment = Shift → 
2. Lower Expected Rate = Less Investment = Shift ←

• Influenced by: Expectations of Future Profitability, Technology, Business Taxes
• Degrees of Excess Capacity (Existing Stock of Capital) 

3. Government Spending

1. More Spending = Shift → 
2. Less Spending = Shift ←

4. Net Exports: Sensitive to-

1. Exchange Rates (International Value of Dollar)
1. Strong $ = More Imports, Fewer Exports = Shift ← 
2. Weak $ = Less Imports, More Exports = Shift →
2. Relative Income
1. Strong Foreign Economies = More Exports = Shift → 
2. Weak Foreign Economies = Less Exports =Shift ←

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