Aggregate Demand and AD Shifts

What is aggregate demand (AD)?

The relationship between the price level and real GDP demanded.

How is AD different from AE?

AE is planned spending at a given output/income; AD relates price level to real output demanded.

Why does the AD curve slope downward?

Wealth effect, interest rate effect, and international trade effect.

What is the wealth effect?

A lower price level raises real purchasing power, encouraging consumption.

What is the interest rate effect?

A lower price level can reduce interest rates and encourage investment and consumption.

What is the international trade effect?

Lower domestic prices can boost exports and reduce imports, increasing net exports.

What shifts AD to the right?

Increases in consumption, investment, government purchases, or net exports.

What shifts AD to the left?

Decreases in consumption, investment, government purchases, or net exports.

How does expansionary fiscal policy affect AD?

Higher government purchases or lower taxes generally shifts AD right.

How does contractionary fiscal policy affect AD?

Lower government purchases or higher taxes generally shifts AD left.

How does expansionary monetary policy generally affect AD?

Easier monetary conditions encourage spending, shifting AD right.

How do expectations shift AD?

Greater consumer or business confidence tends to shift AD right; pessimism tends to shift it left.

How can foreign income shift AD?

Higher foreign income can increase exports, shifting domestic AD right.

What is the difference between a movement along AD and an AD shift?

A price-level change causes movement along AD; a change in spending determinants shifts AD.

How does higher real interest rate r affect NX in the standard model?

Higher r may attract capital inflows, appreciate the currency, and reduce NX.