Aggregate Demand Curve Notes

Aggregate Demand (AD) Curve

Shows the total demand for goods and services in an economy at different price levels.

Equation for Aggregate Demand

Y = C + I + G + NX, where Y is aggregate demand, C is consumption, I is investment, G is government spending, and NX is net exports.

Wealth Effect

When prices decrease, people feel richer, leading to increased spending and demand for goods.

Interest-Rate Effect

Lower prices lead to lower interest rates, encouraging borrowing and investment.

Exchange-Rate Effect

Lower prices cause currency depreciation, making domestic goods cheaper for foreign buyers and increasing net exports.

Decrease in Price Level Effects

Leads to increased quantity demanded due to the wealth effect, lower interest rates, and higher net exports.

Increase in Price Level Effects

Reduces purchasing power, discourages investments, and can decrease net exports.

Factors Leading to AD Curve Shifts

Includes changes in consumption, investment, government spending, and net exports.

Consumption Changes

Tax cuts increase spending (right shift) while tax hikes decrease it (left shift).

Investment Changes

Positive outlook or lower interest rates boost investment (right shift), while pessimism or higher rates decrease it (left shift).

Government Purchases Changes

Increased government spending boosts demand (right shift); cuts lower demand (left shift).

Net Exports Changes

Global economic conditions affect exports; booming economies increase demand (right shift), while recessions decrease it (left shift).