Aggregate Demand

Aggregate Demand (AD)- the demand by consumers, businesses, government, and foreign countries

• C+I+G+Xn
• Changes in price level cause a move along the curve

Why is AD Downward Sloping?

1. Real-Balance Effect
• Higher price levels reduce purchasing powers of money
• Decreases the quantity of expenditures
• Lower price levels increase purchasing power and increase expenditures
2. Interest- Rate Effect
• When price level increases, lenders need to charge higher interest rates to get a real return on their loans
• High interest rates discourage 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
• Exports fall and imports rise, causing real GDP demanded to fall (Xn Decreases)

Shifters of Aggregate Demand 

GDP= C+I+G+Xn

• Two parts to a shift in AD
• Change in C, Ig, G, and Xn
• Multiplier effect that produces a greater change than the original change in the 4 components
• Increases in AD= Shift to the Right
• Decreases in AD= Shift to the Left

Consumption

• Household Spending is affected by:
• Consumer Wealth
• More Wealth= More Spending (AD Shifts Right)
• Less Wealth= Less Spending (AD Shifts Left)
• Consumer Expectations 
• Positive Expectations= More Spending (AD Shifts Right)
• Negative Expectations= Less Spending (AD Shifts Left)
• Household Indebtedness
• Less Debt= More Spending (AD Shifts Right)
• More Debt= Less Spending (AD Shifts Left) 
• Taxes
• Less Taxes= More Spending (AD Shifts Right)
• More Taxes= Less Spending (AD Shifts Left)

Gross Private Investment 

• Investment Spending is sensitive to:
• The Real Interest Rate
• Lower Real Interest Rate= More Investment (AD Shifts Right)
• Higher Real Interest Rate= Less Investment (AD Shifts Left)
• Expected Returns
• High Expected Returns= More Investment (AD Shifts Right)
• Lower Expected Returns= Less Investment (AD Shifts Left)
• Expected Returns are Influenced by:
• Expectations of future profitability
• Technology
• Degree of Excess Capacity (Existing Stock of Capital)
• Business Taxes

Government Spending

• More Government Spending (AD Shifts Right)
• Less Government Spending (AD Shifts Left)

Net Exports

• Net Exports Are Sensitive to
• Exchange Rates (International Value of U.S Dollar)
• Strong $= More Imports and Fewer Exports (AD Shifts Left)
• Weak $= Fewer Imports and More Exports (AD Shifts Right)
• Relative Income
• Strong Foreign Economies= More Exports (AD Shifts Right)
• Weak Foreign Economies= Less Exports (AD Shifts Left)
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