12 Febraury 2016 [Aggregate Demand (Unit 3)]

Aggregate Demand

• Aggregate demand is the demand by consumer, business, government, and foreign countries.
• What definitely doesn't shift the curve?
• Change in price level cause a move along the curve
• Aggregate Demand (AD) = C +I + G + Xn

Three reason why AD is downward sloping

1. Real balance effect
• High price levels reduce the purchasing power of money.
• This decreases the quantity of expenditures.
• Lower price levels increase purchasing power and increase expenditures        .
2. Interest-Rate effect 
• When the price level increases, lenders need to change higher interest rates to get a REAL return on their loans.
• Higher interest rates disscourage consumer spending and business investment.
3. Foreign trade Effect
• When U. S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods.
• Export fall and imports rise causing real GDP demanded to fall. (Xn Decreases).

Shifter of Aggregate Demand

GDP = C + I + G + Xn

Shifter of Aggregate Demand

GDP = C + I + G +Xn

Two parts to a shift in AD

• A change in C, Ig, G, and Xn 
• A multiplier effect that produces a greater change than the original change in the 4 components.
• Increase in AD = AD -->
• Decrease in AD = AD <--

 Increase in AD

 

 

 

 

 

Decrease in AD

 

  

 

Determinate of AD

Consumption

1. Consumer wealth AD
• More wealth = AD -->
• Less wealth = AD <-- 
2. Consumer expectations
• Positve EX = AD -->
• Negative EX = AD <--
3. Household indebtedness  
• Less debt = AD -->
• More debt = AD <--
4. Taxes
• Less taxes = AD -->
• More taxes = AD <--

 

Gross Private Investment

• Investment spending is sensitve to the Real interest rate
• Lower Real interest rate = more investment
• Higher Real interest rate = less investment 

• Expected returns are influence by technology and expectation of future profitability.
• High expected return = More investment
• Low expected return = Less investment

• Government spending 
• More government spending = More investment
• Less government spending = Less investment

• Net Export are sensitive to exchange rules (international value of $)
•  Strong $ = More import and less export
• Weak $ = Less import and more export 
• Relative income
• Strong foreign Economy = More Exports
• Weak foreign Economy = Less Export