Transcript Intro to Aggregate Demand

Intro to Aggregate Demand
AP Macroeconomics
Where we came from…
There is an inverse relationship between
interest rates and investment – as interest
rates go up, investment goes down.
Alternatively, as interest rates go down,
investment rises.
Thus, investors [most likely] enjoy low interest
rates!
Where we came from…
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As interest rates go down, investment rises.
As investment rises, output increases. When
output increases, so too does demand!
Where are we going?
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In this lesson, you’ll learn
about the aggregate
demand.
This lesson explains the
factors that determine
aggregate demand.
Just as in earlier lessons
in supply & demand, you
must understand the
difference between
movement along, and
shifts in, the supply &
demand curves.
A little bit o’demand…
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http://yadayadayadaecon.com/clip/46/
Aggregate Demand defined…
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Aggregate demand represents the sum of
consumption (C), investment spending (I),
government spending (G), and net exports (X-IM
or NX)
The quantity of real GDP demand is the total of
all final goods and services that households,
businesses, governments, and foreigners plan to
buy. This is aggregate demand!
Aggregate Demand
•The aggregate demand
function is inverse function
between price level and
output: as the price level
rises, the level of output
demanded decreases.
•An increase in price from P
to P1 results in a decrease
in real GDP from Y to Y1
Visual 3.7, Unit 3 Macroeconomics, National Council on Economic
Education, http://apeconomics.ncee.net
Factors affecting aggregate demand…
1)
2)
3)
Interest-rate effect
Wealth-effect
Net-export effect
Let’s examine
the things that
make the
curve
downward
sloping…
Interest-rate effect
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Defined as the decrease
in households’ and
businesses’ plans to buy
capital and consumer
durables because a price
level increase will
increase the interest rate.
Financial institutions raise
the interest rate because,
as price levels increase,
purchasing power of
money decreases.
Wealth Effect
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Defined as the
decrease in the real
value of cash balances
as the price level
increases.
When faced with a
decrease in real wealth,
people decrease
consumption and
increase savings to
compensate for this
loss.
Net Export Effect
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Defined as the
decrease in domestic
output demanded with
an increase in the
domestic price level
because domestic
products are more
expensive to foreign
buyers and foreign
goods are less
expensive to domestic
consumers.
We’re better together…
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Combined, these
three effects produce
the downward sloping
aggregate demand
curve.
These three reasons
differ from those that
create a downward
sloping demand curve
for a single commodity,
as we saw in previous
lessons!
Understanding SHIFTS in aggregate
demand…
A decrease in expected
future income, in
government expenditures,
in the money supply or an
increase in taxes will
cause the AD to shift from
AD to AD1.
An increase in expected
future income, in
government expenditures
or in the money supply, or
a decrease in taxes will
cause the AD to shift from
AD to AD2.
Visual 3.8, Unit 3 Macroeconomics, National Council on Economic Education, http://apeconomics.ncee.net
And now…
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Some resources:
http://www.reffonomics.com/textbook2/macroec
onomics2/keynesianthought/keynesiancross.
swf
Works Cited
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Economics of Seinfeld. Demand.
http://yadayadayadaecon.com/clip/46/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.