Unit Three: Aggregate Demand (Part One)

Aggregate Demand

• Notes from 2/12/16

Aggregate Demand- The demand by consumers, businesses, government, and foreign countries

AD= C + Ig + G + Xn

What Doesn't Shift the Curve?: ∆ in Price Level

Why is AD downward Sloping?

• Real Balance Effect: Higher price levels reduce the purchasing power of money
• This decreases the quantity of expenditures
• Lower price levels increase purchasing power and increase expenditures
• Ex. - If  you have $50,000 in your bank account, but inflation erodes your purchasing power, you will likely reduce your spending

• Interest Rate Effect: When price level increases, lenders need to charge higher interest rates to get a REAL return on their loans
• Higher interest rates discourage consumer spending and business investments.

• Foreign Trade Effect: When U.S. price level rises, foreign buyers purchase fewer goods and Americans buy more foreign goods.
• Exports fall and imports rise causing real GDP demanded to fall (Xn decrease)
• Ex. - If prices triple in U.S., Canada will no longer buy U.S. goods, causing quantity demanded of U.S. products to fall. 

Shifters of AD

GDP= C + Ig + G + XN

2 Parts

1.  A Change in C, Ig, G, or Xn
2.  A multiplier effect that produces a greater change than the original change in the 4 components

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