Econ Notes: Aggregate Demand

shows the amount of Real GDP that the private, public, and foreign sector collectively desire to purchase at each possible level

1. Real Balances Effect
• when price-level is high, households and businesses cannot afford to purchase as much output
2. Interest Rate Effect
• a lower price-level decreases the interest rtate which tends ro encourage investment
3. Foreign Purchases Effect
• a higher price-level increases the demand for relatively cheaper imports
• a lower price-level increases the foreign demand for relatively cheaper US exports

Shifts in Aggregate Demand (AD)

-a change in C, Ig, G, and/or Xn

-multiplier effect

-increase in AD, shift right

-decrease in AD, shift 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 expectatios = more spending (AD shifts right)
• negative expectations = less spending (shift left)
• Household Indebtness
• Less debt = more spending (shift right)
• More debt = less spending (shift 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
• Higher Expected Returns = More Investment (AD shifts right)
• Lower Expected Returns = Less Investment (AD shifts left)
• Expected returns 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
-sensitive to:

• Exchange Rates (International value of $)
• 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)