3.1 Aggregate Demand

Aggregate Demand

is the demand for ALL goods and services by:

1. consumers (C)

2. businesses (I)

3. government (G)

4. foreign countries (XN)

if GDP increases, so does this and vice versa

Aggregate Output

= Real GDP

is the country’s production
RGDP falls = employment falls

Aggregate Spending

= Real GDP

C + I + G + XN

Aggregate Income

= Real GDP

W + R + I + P

Aggregate Price Level

a measure of inflation (like GDP deflator)

What does “Ye” stand for

symbol for national income

3 Effects on Aggregate Demand (Why it’s downwards sloping)

1. Wealth Effect

2. Interest Rate Effect

3. Foreign Trade Effect

Wealth Effect

• Price Level and CONSUMPTION

• higher prices reduce purchasing power of money and vice versa

  • decreases quantity of expenditures

Interest Rate Effect

• Price level and INVESTMENT

• when price level increases, lenders must charge higher to get a real return on loans

• high interest rates discourage consumer spending and invest spending

Foreign Trade Effect

• Price Level and NET EXPORTS

• When US price level increases, foreign countries buy less US goods and Americans buy more foreign goods

• Exports fall and Imports rise → RGDP decreases

Shifters of Aggregate Demand

1. Consumer Spending

2. Investment Spending

3. Govt. Spending

4. Net Exports

AD = GDP = C + I + G + XN

Consumer Spending Shifter

• increase in disposable income and wealth

• consumer expectations

• household debt

• taxes (income tax)

• interest rates

Investment SPending

• interest rates

• future business expectations

• productivity and technology

• business taxes

• unplanned changes to inventories

Government Spending

• gov expenditures

Net Exports

• Exchange Rates

• Relative Prices

• National income compared to abroad

Determinants of AD

changes to govt policies

1. Fiscal Policy

2. Monetary Policy

Fiscal Policy

Congress/President change taxes, transfer payments, and govt spending on goods & services

Monetary Policy

The Federal Reserve changes the quantity of money in circulation and the interest rate