Aggregate Demand Curve

Flashcards covering the aggregate demand curve, its determinants, and shifts of the curve

AD-AS Model

A model of aggregate demand (AD) & aggregate supply (AS) used to explain short-run fluctuations in economic activity around its long-run trend.

Aggregate-Demand Curve

Shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level. It is downward sloping.

Wealth Effect

One reason why the aggregate demand curve slopes downward; price increases lead to a fall in real wealth, reducing the quantity of goods and services demanded.

Exchange-Rate Effect

One reason why the aggregate demand curve slopes downward; higher domestic prices cause fewer exports by U.S. firms.

Changes in Consumption (C)

Events that change how much people want to consume at a given price level, such as changes in taxes or wealth. If C increases, the AD curve shifts to the right.

Changes in Investment (I)

Events that change how much firms want to invest at a given price level, such as better technology, tax policy, or money supply. If I increases, the AD curve shifts to the right.

Changes in Government Purchases (G)

Policy makers changing government spending at a given price level, such as building new roads. If G increases, the AD curve shifts to the right.

Changes in Net Exports (NX)

Events that change net exports for a given price level, where NX = Exports - Imports. Examples include a recession in Europe or a change in the exchange rate. If NX increases, the AD curve shifts to the right.