Unit 3 - Aggregate Demand

What is Aggregate Demand (AD)?
-Shows the amount of real GDP that the private public and foreign sector collectively desire to purchase at each possible price level

-The relationship between the price level and the level of real GDP is inverse

Three Reasons AD is downward sloping

Real-Balance Effect
-When the Price-level is high household and businesses cannot afford to purchase as much out put.

-When the price-level is low households and businesses can afford to purchase more output
Interest Rate Effect

-A higher price level increases that interest rate which tends to discourage investment

-A lower price level decreases the interest rate which tends to encourage investment

Foreign-Purchase Effect
-A higher price level increases the demand for relatively cheaper imports

-A lower price level increases the foreign demand for relatively cheaper U.S exports

Shifts in Aggregate Demand (AD)
It happens when:
- Change in C, Ig, G, and/or Xn
- Multiplier effect that produces a greater change than the 4 components

*increases in AD= AD ->
*decreases in AD= AD <-

 

Aggregate Demand Curve

AD increased

AD decreased