Unit 3

2-16-17

Aggregate Demand Curve

• Aggregate Demand curve
• AD is demand by consumers, businesses, government and foreign countries 
• changes in price level cause move along curve not shift on curve
• inverse relationship between price level and level of RGDP

• 3 reasons why AD downward sloping
• 1- wealth effect
• higher prices reduce purchasing power of $
• decreases quantity of expenditures
• lower price level increase purchasing power and increase expenditures
• 2- interest rate effect
• As price level increases, lenders need to charge higher interest rates to get real return on their loans
•  higher interest rates discourage consumer spending and business investment
• 3- Foreign trade effect
• When U.S, price level increases, foreign buyers purchases fewer U.S. goods and americans buy more foreign goods
• exports fall and imports rise causing RGDP demanded to fall. (Xn decreases)
• Shift in AD
• 2 parts to shift in AD
• A change in GDP
• multiplier effect that produces greater change than original change in 4 component
• Increases in AD=AD right
• Decrease in AD=AD left  
• 4 determinate of AD 
• 1-GDP: C, IG, G, Xn
• 2: Change in investment spending
• real interest rates (price of borrowing $)
• (if interest rate increases/decreases)
• future business expectations (High expectations)
• productivity and technology (new robots)
• business taxes (higher corporate taxes mean)
• 3: Change in govt spending
• war, nationalized health care, decrease defense spending
• 4 : change in net exports (X-M)
• exchange rates
• if U.S, dollar depreciates relative to euro
• national income compared abroad
• if major importer has a recession
• AD= GDP
• "if U.S. gets a cold, Canada gets Pneumonia
• Govt spending
• more govt spending AD ------->
• less govt spending AD <------- 

REALLY?!? LAST MINUTE STUDYING AGAIN?