1 aggregate demand (ad): the economy- wide demand for goods and services. aggregate demand curve...

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Aggregate Demand (AD): the economy-wide demand for goods and services.

Aggregate demand curve relates aggregate expenditure for goods and services to the price level

The aggregate demand curve slopes downward owing to price-level effects:– Wealth Effect (Real Wealth/Real

Balances) – Interest Rate Effect– International Trade Effect

(Substitution)

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Why the Aggregate Demand Curve Slopes Downward: Wealth Effect

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Interest Rate Effect

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International Trade Effect

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The Aggregate Demand Curve

Changes in the price level result in changes in quantity demanded.

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Factors that Affect AD

Consumption– Income– Wealth– Interest Rates– Expectations– Demongraphics– Taxes

Investment– Interest Rates– Technology– Cost of Capital Goods– Capacity Utilization

AD = C + I + G + NXAD = C + I + G + NX Government Spending Net Exports

– Domestic & Foreign Income

– Domestic & Foreign Prices

– Exchange Rates– Government Policy

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Shifts in Aggregate Demand

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Shifts in Aggregate Demand

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Shifts in Aggregate Demand

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Shifting Aggregate Demand Curve

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Effects of a Change in Aggregate Demand

Demand-pull inflation: rapid increases in AD outpaces the growth of AS price level up (inflation).