Aggregate Demand
2-16-17
Aggregate Demand: Demand by consumers, businesses, govt, and foreign countries.
- Changes in price level cause a move along curve not a shift.
- AD = C + IG + G + Xn
*inverse relationship between price level and real GDP.*
Why is AD downward slipping?
- Wealth Effect
- higher price reduce purchasing power of $
- decreased quantity of expenditures
- Lower price levels increase purchasing power and increase expenditures.
- Interest rate Effect
- As price level rises, lenders need to charge higher interest rates to get real return of rates
- Foreign Trade Effect
- When U.S price level increases, foreign buyers buy less U.S goods, Americans buy more foreign.
- Exports fall, imports rise real GDP demanded to fall.
4 Determinants of AD
- Consumption
- Gross Private Domestic Investment
- Government Spending
- Net Exports (Exports-Imports)
- AD increase shift →
- AD decrease shift ←
- More govt spending AD →
- Less govt spending AD ←
- AD = GDP = C+Ig+G+Xn
Your notes are easy to understand and read with the way that they are formatted. I noticed that you wrote down the determinants of AD, but you did not put any additional information about them. This missing information could help you understand AD better. Another important thing to know is the two parts to a shift in AD. What are those shifts? What causes AD to shift left or right?
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