Macroeconomics - AD/AS Model

Aggregate demand curve

Shows the relationship between the price level and the quantity of real GDP demanded by households, firms and the government, plus net exports

GDP has 4 components:

Consumption (C), investment (I), government purchases (G) and net exports (NX)

GDP (Y) = ?

Y = C + I + G + NX

Why is the Aggregate Demand curve downward sloping?

A fall in the price level increases the quantity of real GDP demanded

What is the most important variable determining the consumption of households?

Current income

Three reasons why the AD curve slopes downward":

1. The wealth effect

2. The interest-rate effect

3. The international-trade effect

Ceteris paribus

All else remains equal

Variables that shift the AD curve:

1. Changes in government policies

2. Changes in the expectations of households and firms

3. Changes in foreign variables.

Where do higher interest rates shift the AD curve?

To the left

Where does an increase in government purchases shift the AD curve?

To the right (ceteris paribus)