Aggregate Demand

1. Aggregate Demand - Shows amount of real GDP that the private, public and foreign a sector collectively desire to purchase at each possible price level
2. The relationship between price level and level of real GDP is inverse

The Reason AD is Downward Sloping

1. Real-Balances Effect
1. When price level is high, households and businesses can not afford to purchase as much output
2. When price level is low, households and businesses can afford to purchase more output 
2. Interest-Rate Effect
1. A higher price level increases interest rate, which tends to discourage investment
2. A lower price level decreases interest rate, which tends to encourage investment 
3. Foreign Purchases Effect
1. Higher price level increases demand for relatively cheaper imports
2. Lower price level increases foreign demand for cheaper US exports 
4. Shifts in Aggregate Demand
5. There are two parts to a shift in AD:
1. Change in C, Ig, G and Xn
2. Multiplier effect that produces greater change than original change in the 4 components
6. Increases in AD go right
7. Decreases go left
8. Determinants of AD

Consumption

1. Household spending is affected by:
1. Consumer Wealth
1. More wealth, more spending (AD increases)
2. Less wealth, less spending (AD decreases)

1. Consumer Expectations
1. Positive expectations - more spending 
2. Negative expectations - less spending 

1. Household Indebtedness 
1. Less debt, more spending 
2. More debt, less spending 

1. Taxes
1. Less taxes, more spending
2. More taxes, less spending 

1. Gross Private Investment

1. Investment spending is sensitive to:
1. The Real Interest Rate
1. Lower interest rate, more investment (AD increases)
2. Higher interest rate, less investment (AD decreases)

1. Expected Returns
1. Higher expected returns, more investment
2. Lower expected returns, less investment 

1. Expected returns are influenced by: 

1. Expectations of future profitability
2. Technology
3. Degree of excess capacity (Existing Stock of Capital)
4. Business Taxes

Government Spending

1. More government spending, AD increases
2. Less government spending, AD decreases

Net Exports

1. Net Exports are sensitive to:
1. Exchange Rates (International value of $)
1. Strong $ = More imports and fewer exports (AD decreases)
2. Weak $ = Fewer imports and more exports (AD increases) 

1. Relative Income
1. Strong foreign economies = more exports, AD increases
2. Weak foreign economies = less exports, AD decreases