AD

AD

Aggreagate Demand- shows the amount of real GDP that the private, public and foreign sector collectively desire to purchase at each possible price level.

The Relationship between the price level and the level of real GDP is inverse 

Three Reasons AD is downward sloping-

1. Real Balances Effect- Price low, more buying. Price high, low buying

2. Interest rate effect- High interest rate discourages investment.

Lower Price level decreases the interest rate, tend to encourage investment 

3. Foreign Purchases Effect- Higher prices makes us want cheaper imports. Lesser price means foreign demand for cheap US exports.

Shifts in Aggregate Demand-

1. Change in Expenditure approach

2. Multiplier Effect that produces a greater change in the original change in the 4 components.

Increase in AD= Shift Right

Decreases in AD= Shift Left

Determinants of AD-   

Consumption

Household spending is affected by-

Consumer Wealth-  More Wealth= More Spending shift right

Less Wealth= Less spending shift left

Consumer Expectation-Postivie Expectation= More spending shift right

negative expectation= Less spending shifts left

Household Indebtedness- Less Debt= More Spending Shift right

More Debt= Less Spending Shift left.

Taxes- Less Taxes=  More spending Shift right. More Taxes= Less Spending. Shift Left

Gross Privet Investment

The Real Interest Rate-

Low=More ->

High= Less <-

Expected Returns-

High= More Investment  ->

Lower= Less Investment <-

Expected return are influenced by-

Expectation of future profitability.

Technology

Degree of  Excess Capacity ( Existing Stock of Capital)

Business Taxing

Government Spending 

More government spending = ->

Less government spending = <-

Net Exports

Exchange Rate-

Strong $= More imports <-

Weak $= More Exports ->

Relative Income-

Strong Foreign Economy= More Exports ->

Weak Foreign Economy= Less Exports <-