Skip to main content

Unit 3: Aggregate Demand

Aggregate Demand curve:
-AD is demanded by consumers, businesses, government, and foreign countries
-Changes in price level move along curve not shifts on curve
Aggregate Demand (AD): Shows amount of real GDP that 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


3 Reasons Why AD is downward sloping:
  1. Wealth Effect: higher prices reduce purchasing power of $, decreases quantity of expenditures, lower price levels increase purchasing power and increase expenditures ; ex: price level goes up, gdp demand goes down
  2. Interest-Rate Effect: as price level increase, lenders need to charge higher interest rates to get REAL return on their loans, higher interest rates discourage consumer spending and business investment ; ex: increase in price leads to increase in interest rate from 5% to 25%. Less likely to take out loans to improve business
  3. Foreign Trade Effect: when US price level rises, foreign buyers purchase fewer US goods and Americans buy more foreign goods, exports fall and imports rise causing real GDP demanded to fall (Xn Decreases) ; ex: if triple price in US, Canada will no longer buy US goods causing quantity demand of products to fall
Shifts in Aggregate Demand:
2 Parts to a shift: change in C, Ig, G and/or Xn and multiplier effect that produce greater change than original change in 4 components
increase in ad = ad right /// decrease in ad = ad left
Determinants of AD:
-Change in Consumer Spending: consumer wealth (boom in stock market), consumer expectation (people fear recession), household indebtedness (more consumer debt), Taxes (decrease in income taxes)
-Changes in Investment Spending: real interest rates (price of borrowing $; if interest rates increase/decrease...), future business expectations (higher expectation, productivity and technology (new robots...), business taxes (higher corporates mean..)
-Changes in Government Spending: War, Nationalized Health Care, Decrease in Defense Spending
-Change in Net Exports (X-N): exchange rate (if US dollar depreciates relative to euro...), National Income Compared to Abroad (if major importer has recession… /// if US has a recession…) “if US gets a cold, Canada gets Pneumonia”
AD=GDP=C+Ig+G+Xn
Government Spending: more = AD right & less = AD left

Image result for aggregate demand

Comments

Post a Comment

Popular posts from this blog

Unit 1

Price Ceiling - legal maximum price meant to help BUYERS (excess demand) Lower prices for some consumers (ex: rent control) Shortages Long line for buyers Illegal sells above equilibrium price Price Floor - legal minimum price meant to help SELLERS (excess supply) Higher product prices Surplus Higher taxes Waste
1 comment
Read more

Unit 1: Basic Economic Concept

Scarcity: fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources Economics: science that deals with production, distribution, consumption of goods/services, or material welfare of humankind; financial considerations; economically significant aspects   1st Pillar of Wisdom: nothing in our material world can come from nowhere, nor be free; everything in our economic life has a source, destination, and cost that must be paid by someone 5 Key Economic Assumptions: 1) society’s wants are unlimited, but ALL resources are limited (Scarcity) 2) due to scarcity, choices are mandatory. Every choice has a cost. (Trade -Off) 3) everyone’s goal is to make choices that maximize satisfaction. Everyone acts in own “self-interest” 4) everyone makes decisions by comparing marginal costs and marginal benefits of every choice. 5) real-life situations can be explained and analyzed through simplified models and graphs C...
1 comment
Read more

Unit 2

Real GDP: Price x Quantity ; value of output produced in constant based year prices that is adjusted for inflation. Can increase from year to year only if output increases. Nominal GDP: Price x Quantity ; value of output produced in current year prices. Can increase from year to year if either prices or output increases In the base year, current prices is equal to base year (constant) prices In years after the base year, nominal GDP exceeds real GDP In years before the base year, real GDP exceeds nominal GDP GDP Inflator: a price index used to adjust from nominal to real GDP In the base year, the GDP deflator = 100 For years after the base year, GDP Deflator > 100 For years before the base year, GDP Deflator < 100 Deflator Formula: new-old/old GDP Deflator = (nominal GDP/real GDP x 100) Inflation: a general rise in the price level (new[price index]-old[price index] /old x 100) will result in percentage Consumer Price Index: measures cost of ...
1 comment
Read more