AGGREGATE DEMAND

WHY IS AD DOWNWARD SLOPING?

1) Real Balance Effect: 

    -Higher price levels reduce the purchasing power of money.
    -This decreases the quantity of expenditures.
    -Lower price levels increase purchasing power and increase expenditures.

2) Interest Rate Effect:

    -When the price level increases, lenders need to charge higher interest rates to get a REAL return on their       loans.
    -Higher interest rates discourage consumer spending and business investments.

3) Foreign Trade Effect:

    -When U.S. price level rises, 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 decreases).

SHIFTERS OF AGGREGATE DEMAND

GDP= C+I+G+Xn

 There are two parts to a shift in AD:
  -A change in C, I, G AND Xn.
  -A multiplier effect that produces a greater change than the original change in the four components.
    *Increase in AD = AD ->
    *Decrease in AD = AD <-

CONSUMPTION 

Household spending is affected by;

-Consumer wealth

  *More wealth = more spending(AD shifts ->)
  *Less wealth = less spending(AD shifts <-)

-Consumer expectations

  *Positive expectations = more spending(AD shifts ->)
  *Negative expectations = less spending(AD shifts <-)

-Taxes

  *Less taxes = more spending(AD shifts ->)
   *More taxes = less spending(ad shifts <-)

GROSS PRIVATE INVESTMENT

Investment spending is sensitive to:

-The real Interest Rate

  *Lower real interest rates = more investment(AD ->)
  *Higher real interest rate = less investment(AD <-)

-Expected Returns

 *Higher expected returns = more investment(AD ->)
 *Lower expected returns = less investment(AD <-)
 *Expected returns are influenced by
   +Expectations of future profitability
   +Technology
   +Degree of excess capacity(existing stock of capital)
   +Business taxes

GOVERNMENT SPENDING

-More government spending(AD->)
-Less government spending (AD<-)

NET EXPORTS 

Net exports are sensitive to:

-Exchange rates(international value of $)

 *Strong$ = more imports and fewer exports = (AD <-)
 *Weak$ = fewer imports and more exports =(AD ->)

-Relative income

 *Strong foreign economies = more exports =(AD ->)
 *Weak foreign economies = less exports =(AD <-)