Aggregate Demand (AD)

• shows amount of Real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level
• relationship between price level and level of Real GDP is inverse
• Price Level ↑  Real GDP ↓
• Price Level ↓  Real GDP ↑

• Aggregate Demand Curve

3 Reasons AD is Downward Sloping - 

• Real-Balance Effect
• when price level is high, households and businesses cannot afford to purchase as much output
• when the price level is low, households and businesses can afford to purchase more output
• Interest-Rate Effect
• higher price level increases interest rates which tends to discourage investment
• lower price levels decrease interest rate which tends to encourage investment
• Foreign Purchases Effect
• higher price level increases demand for relatively cheaper imports
• lower price level increases foreign demand for relatively cheaper U.S. exports

Shifts in AD -

• 2 parts to shift in AD
• changes in C, Ig, G, and/or Xn
• multiplier effect that produces greater change than original change in the four components 
• increase in AD = AD →
• decrease in AD = AD ←

Shows the Decrease and Increase of AD

Consumption -

• Household spending is affect by :
• Consumer Wealth
• more wealth = more spending (AD →)
• less wealth = less spending (AD ←)
• Consumer Expectations 
• positive expectations = more spending (AD →)
• ex : you know you will get a raise, so you go out and spend money the day before
• negative expectations = less spending (AD ←)
• Household Indebtedness
• less debt = more spending (AD →)
• more debt = less spending (AD ←)
• Taxes 
• less taxes = more spending (AD →)
• more taxes = less spending (AD ←)

Gross Private Investment - 

• Investment Spending is Sensitive to : 
• Real Interest Rate
• lower real interest rate = 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)

Government Spending -

• more government spending (AD →)
• less government spending (AD ←)

Net Exports -

• Net Exports are Sensitive to :
• Exchange Rates (international value of the dollar)
• strong dollar = more imports and fewer exports (AD →)
• weak dollar = less imports and more exports (AD →)
• Relative Income 
• strong foreign economies = more exports (AD →)
• weak foreign economics = less exports (AD ←)