3.1 aggregate demand

GDP expenditure equation

C + I + G + X

GDP income equation

wage income + profit

Net exports =

exports - imports

investment is done by ___ who spend money on ____

Businesses & capital goods

aggregate demand

“added all together.” 

• combine all prices and all quantities.

• is all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels. 

The Wealth Effect

• Higher price levels = less purchasing power 

• Lower price levels = more purchasing power

2. Interest-Rate Effect

• PL goes up → Interest rates go up→ spending & investment go down
  

• Higher interest rates discourage consumption and investment.

3. Exchange Rate Effect-

• PL go up → Foreigners buy less US goods 

• Exports go down and imports go up

  • Does this increase or decrease GDP?

Decrease b/c exports - imports

Change in Consumer Spending

• Increase in Disposable Income (Higher incomes…)

• Consumer Expectations (People fear a recession…)

• Household Indebtedness (More consumer debt…)

• Taxes (Decrease in income taxes…)

2. Change in Investment Spending

• Real Interest Rates (Price of borrowing $)

  • (If interest rates increase…)

  • (If interest rates decrease…)

• Future Business Expectations (High expectations…)

• Business Taxes (Higher corporate taxes means…)

Change in Government Spending

• Government Expenditures

  • (Decrease in defense spending…)

  • (Increase in public works programs…)

Change in Net Exports (X-M)

• Exchange Rates

  • (If the us dollar depreciates relative to the euro…) 

• National Income Compared to Abroad

  • (If a major importer has a recession…)

  • (If the US has a recession…)