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AP MACRO 3.1

AP Macro Unit 3: National Income and Price Determination

Aggregate Demand

  • Aggregate Demand: Total demand for goods and services in an economy at a given price level.

What is Aggregate Demand?

  • Defined by the total spending in an economy:

    • C = Consumer Spending

    • I = Investment Spending

    • G = Government Spending

    • NX = Net Exports

The Aggregate Demand Curve

  • Aggregate Demand Variables: The curve shows the relationship between the price level and the quantity of goods demanded.

Why is AD Downward Sloping?

  1. The Wealth Effect

    • As prices fall, the purchasing power of consumer wealth increases, leading to higher quantity demanded.

  2. The Interest Rate Effect

    • Lower price levels lead to lower interest rates, encouraging more investment due to cheaper loans.

  3. The Foreign Trade (Net Exports) Effect

    • As domestic prices decrease, U.S. goods become cheaper for foreign buyers, increasing net exports.

Shifters of Aggregate Demand

  • Understanding how these factors cause shifts in Aggregate Demand under different scenarios is crucial.

Shifters of Aggregate Demand: Details

    1. Changes in Consumer Spending

    • Factors include:

      • Disposable Income

      • Consumer Expectations

      • Household Indebtedness

    1. Changes in Investment Spending

    • Factors include:

      • Real Interest Rates

      • Future Business Confidence

      • Capital Good Purchases

    1. Changes in Government Spending

    1. Changes in Net Exports

    • Related factors include:

      • Exchange Rates

      • National Income Abroad

Aggregate Demand Equation

  • AD = C + I + G + NX

  • This equation can also be used to compute Nominal GDP.

Shifts in Aggregate Demand

  • An increase in spending shifts AD to the right.

  • A decrease in spending shifts AD to the left.

  • Note: Price levels alone do not shift the curve; they lead to movements along the curve.

Aggregate Demand Shifting Practice

  • Engage in scenarios to understand the component of AD affected and overall impact on AD, specifically for the U.S. economy.

Scenario Examples

  • Spain experiences an increase in income

    • Result: Net Exports increase due to higher foreign demand for U.S. products.

  • Government increases household income taxes

    • Result: Consumer Spending decreases as higher taxes lower disposable income.

  • Interest Rates rise from 5% to 5.5%

    • Result: Investment decreases since higher interest rates deter business investment.

  • Forsyth County Schools purchases MacBook Pros for students

    • Result: Government Spending increases AD.

  • Wendy’s purchases new grills for all restaurants

    • Result: Investment Spending increases AD.

  • The U.S. dollar appreciates

    • Result: Net Exports decrease as American goods become more expensive for foreign buyers.

  • Stock prices start to drop

    • Note: This does not affect GDP; thus, it does not affect Aggregate Demand.

  • Government cuts spending to reduce budget deficit

    • Result: Decrease in Government Spending decreases AD.

  • Inflation falls by 2%

    • Note: This causes a movement along the AD curve, not a shift.

  • U.S. imports fall

    • Result: Net Exports increase; thus, AD increases.

Homework

  • Complete Workbook Topic 3.1 to reinforce learning about Aggregate Demand.