Unit 3: Notes and Need-To-Knows 2.11.15

Aggregate demand:  shows amount of real GDP that private, public, and foreign sector collectively desire to purchase at each possible price level.

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

Reasons why AD is downward sloping:

1.Interest rate effect:

Higher price level increase interest rule which tends to discourage investment. (Vice Versa)

2. Real balance effect: 

When price level is high households and businesses cannot afford to purchase as much output. (Vice Versa)

3. Foreign purchase effect: 
Higher price level increases demand for relatively cheaper imports.
Lower price level increased the foreign demand for relatively cheaper U.S. exports.

Shifts in aggregate demand:
Changes in Consumption, Investment, Government Spending, and Net Exports

Increase = Rightward Shift
Decrease = Leftward Shift

Consumption is Affected by:

1. Consumer wealth: Higher Income results in more spending

2. Consumer expectation: Higher Expectations results in more spending

3. Household indebteners: Less Debt shifts AD to the right

4. Taxes: Less Taxes results in more spending

Gross Private Investment is Affected by: 

1. Real Investment Rate: Higher Rates shifts AD to the Right (vice versa)

2. Expected Returns: Higher Expectations means Higher Investment

Government Spending: 

More Spending shifts AD to the Right

Net exports is Affected by:
Exchange rates: Higher Value shift AD to the Right

Relative income: More Exports shifts AD to the Right