Aggregate Demand Curve- 02/16/ 17

Aggregate Demand Curve

Aggregate demand curve:
- demand by consumes, businesses, government and foreign countries

- Changes in price level cause a move along the curve not a shift of the curve

- Shows the amount of Real GDP that the private, public and foreign sector collectively desire to purchase at each possible prices level
-The relationship between the prices level and the level of read GDP is inverse

-3 Reasons AD is downward sloping

            1) Wealth Effect
                  -Higher prices reduce purchasing power of money
                  -This decreases the quantity of expenditures
                  -Lower price levels increases purchasing power and increase expenditure

            2) Interest- Rate Effect

                   -As price level increases, lenders need to charge higher interest rates to get a real return or their loans
                   -Higher interest rates discourage consumer spending and business investment

            3) Foreign Trade Effect

                  -When U.S price level rises, foreign buyers purchase fewer U.S goof and Americans buy more foreign goods.

                  -Exports fall and inputs rise causing real GDP demanded to fall

(Xn Decreases)
                        1) A change in C, Ig, G, and or Xn

                        2) A multiplier effect original change in the 4 components

                             -increase in AD = AD ->
                             -Decrease in AD = AD <-