3.1: Aggregate Demand and Supply

These flashcards cover key concepts regarding Aggregate Demand, its effects, and factors influencing shifts in the demand curve as discussed in the lecture notes.

What does Aggregate Demand represent?

All the goods and services (real GDP) that buyers (consumers, businesses, government, and foreign countries) are willing to purchase at different price levels.

What is the relationship between price level and Real GDP demanded?

Inverse.

What are the components of Aggregate Demand formula?

AD = C + I + G + Xn (consumer spending + investment spending + government spending + net exports)

What is the Wealth Effect (or real balance effect)?

Higher price levels = decreased purchasing power = lower expenditures

Lower price levels = increased purchasing power = higher expenditures

What does not cause a shift of the AD curve?

Changes in price level

Why is the aggregate demand curve downward sloping?

1. Wealth effect (real balance effect)

2. Interest rate effect

3. Foreign trade effect

What is the interest rate effect?

When the price level rises, lenders charge higher interest rates to get a real return on their loans. Higher interest rates discourage consumer spending and business investment.

What is the foreign trade effect?

When U.S. price levels rise, consumers purchase more foreign products and foreign countries purchase fewer domestic products. Imports rise and exports fall.

What is the effect of the foreign trade effect on net exports and GDP?

Exports fall and imports rise (X_N decreases). Real GDP demanded falls.

An increase in spending shifts the aggregate demand curve ____, and a decrease in spending shifts it ____.

right, left

Shifters of aggregate demand

1. Change in consumer spending

2. Change in investment spending

3. Change in government spending

4. Change in net exports (X - M or Xn)

[AD Shifters] What are the components of a change in consumer spending?

1. Increase in disposable income

2. Consumer expectations

3. Household indebtedness

4. Taxes

[AD Shifters] What are the components of a change in investment spending?

1. Real interest rates (price of borrowing $)

2. Future business expectations

3. Productivity and technology

4. Business taxes

[AD Shifters] What are the components of a change in government spending?

Government expenditures

[AD Shifters] What are the components of a change in net exports (X - M)?

1. Exchange rates

2. National income compared to abroad