3.1 Aggregate Demand

aggregate

added all together

aggregate demand

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

price level increases…

(inflation), then real GDP demanded falls

price level decreases…

(deflation), the real GDP demanded increases

Aggregate Demand Curve

the demand by consumer, business, government, and foreign countries.

• changes in price level causes a move along the curve

the wealth effect

• downward sloping

• higher price level reduce the purchasing power of money, decreasing the quantity of expenditures

• lower price levels increase purchasing power & expenditures

interest rate effect

• downward sloping

• when the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans

• higher interest rates discourage consumer spending and business investment.

foreign trade effect

• downward sloping

• when U.S. price level rises, foreign buyers purchases fewer U.S. goods and Americans buy more foreign goods

• export fall and imports rise causing real GDP demanded to fall (Xn decreases)

change in consumer spending - shifts in AD

• increase in disposable income

• consumer expectations

• household indebtedness

• taxes

change in investment spending

• real interest rates (price of borrowing $)

• future business expectations

• productivity and technology

• business taxes

Change in government spending

• government expenditures

Change in net exports (X-M)

• exchange rates

• national income compared to abroad

AD =

GDP = C + I + G + Xn