Aggregate demand curve

AD is the demand by consumers businesses, gov't, and foreign countries.

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

AD= C+ I+ G+ Xn


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


Why AD is downward
-Wealth effect- Prices increase. purchase power of dollar decreases.
-Decrease the quantity of expenditures 
-Lower prices level increases. purchasing power increase and increase expenditures.

-Interest Rate effect
As PL increases, lenders need to charge.

Higher interest rates to get a real return on their loans
Increase rates increase discourage consumer spending and businessinvestment.

-Foreign Trade effect 
When US price levels increase, foreign buyers purchase fewer U.S goods and Americans buy more foreign goods.

Exports fall and imports rise causing real GDP demanded to fall (Xn deceases)

Shifts in AD 

Two ways 
- A change in C+Ig+ or Xn 
-Multiplier effect that produces a greater change than the original change in 4 components
Increase in AD= AD shifts right, decrease shfts left

Determinants of AD
-Consumption
-Gross Private Investment
-Gov't Spending
-Net Exports

Change in consumer spending 
-consumer wealth(boom in stock market)
-consumer expectations- (people fear a recession)
-households indebt (more consumer debt)
-Taxes( decreases in income taxes)

Change in Investment Spending 
-Real interest Rates(price of borrowing)
                               (If interest rate increasing)
                               ( If interest Rate decreasing)
Future Business Expectations (High Expectations)
Productivity and technology (New robots)
Business Taxes (Higher corporate Taxes)

Change in gov't spending
-War
-Nationalized Health Care
Decrease in defense spending

Change in Net exports 
-Exchange rates
-(If the US dollar depreciates relative to the euro)
Nat'l Income compared to Abroad
(if a mjor importer has a recession)
(if a US has a recession) 
"If the US gets a cold, Canada gets Pneumonia) 

AD= GDP= C+I+G+Xn

Government Spending
More Gov't spending (AD shifts right)
Less Gov't spending (AD shifts left)