UNIT 3: Aggregate Demand Curve.

                                                        Aggregate Demand Curve

Aggregate Demand is the demand by consumers, businesses, government and foreign countries.
             what definitely doesn't shift the curve?
       changes in price level causes a move along the curve.

         Three reasons why Aggregate demand is down ward slopping:
•Real balance effect--- shift to the left
      -higher price levels reduce the purchasing power of money.
       -this decreases the quantity of expenditures.
        -lower price levels increase purchasing power and increase expenditures.
   Example: if the balance in your bank was $50,000, but inflation erodes your purchasing power, you will likely reduce your spending.

•Interest rate effect
       -when the price level increases, lenders need to charge higher interest rates to get a real return on their loans.
      -higher interest rates discourage consumer spending and business investment . Why?
•foreign trade effect
     -when US price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods.
      -exports fall and import rises causing real GDP demanded to fall.(Xn decreases).
             Shifters of aggregate demand
GDP= C+I+G+Xn

Shifts in aggregate demand (AD)
•there are two parts to a shift in AD:
    -a change in C,IG,G and/or Xn
     -a multiplier effect that produces a greater change than the original change in the 4 components.
•increases in AD = AD >shifting to the right.
•decrease in AD = AD < shifting left.

increase in AD

decrease in AD

                                                         Consumption
  -consumer wealth
       •more wealth= more spending (AD shift 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 indebtness
          •less debt = more spending (AD shifts right >)
           •more debt = less spending (AD shifts<)
  -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 (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 $)
      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 expensive = (AD shifts left)