Econ -Unit 3- Chap 12 Notes

Aggregate Demand

• A schedule or curve that shows the amounts of real output that buyers desire to purchase at each price level
  
• Negative relation between price level and real GDP
  

  
  

  Aggregate Demand Curve
  

• When graphed it curves downward
  
  • Centered on the income and substitution effect
    
• When economy moves down the aggregate curve it moves to a lower general price
  

  
  

  Really-Balances Effect;
  

• Change in the price producing creates a real-balances effect
  

  Inetest-Rtae effect
  

• Also curves downward because of interest rate effect.
  
• We assume that the supply of money in the economy is fixed
  
• A higher price level increases the demand for money
  

  Foreign Purchase Effect
  

• Foreign purchase effect also causes a downward slope
  
• When US price levels rises relative to foreign price levels foreigners buy fewer US goods and American's buy more imports
  
• Fall in exports; rise in imports
  

  
  

  Determinants of Aggregate Demand
  

  A change in price level will change amount of aggregate spending and therefore change real GDP of economy
  

• If one of the determents of aggregates of demand changes the demand curve will shift
  
• A change in one of the determinant of demand that directly changes the amount of real GDP demanded
  
• Multiplier effect that produces a greater ultimate change in aggregate demand than the initiating change in spending
  

  Consumer Spending
  

• If consumers buy more output at each price level, the AD curve will shift to the right
  
• If they buy less the curve will shift to the left
  

  Consumer Wealth:
  

• Includes both financial assets and physical assets
  
• An increase prompts people to save less and buy more
  

  Consumer Expectation
  

• May alter spending
  
• When one thinks that their income is too rise they tend to spend more
  
• A widely held expectation of surging inflation in the near future may increase AG because consumers will want to buy before prices rise.
  

  Taxes
  

• Reduction in income tax rates raises take-home income and increase consumer purchases at each possible price level
  
• Tax cuts shift to right, Tax increases bring curve to left
  

  Investment Spending
  

• The second major determinant of AD
  
• Decline in investments = left
  
• Increase= left
  

  Real Interest Rates
  

• Increase in interest rates = lower investment spending and lower AD
  
• Increase in money supply lowers the interest rate, thereby increasing investment and AD
  

  Expected Return
  

• Expectations: If firms are positive about what will happen in the future they will more likely invest
  
• Technology: Better technology enhance expected returns on investment thus increasing AD
  
• Excess capacity: Reduce expected return on new investment and decrease AD
  
• Taxes: Increase will reduce after-tax profits and lower expected returns.
  

  Government Spending
  

• Increase will shift AD curve to the right
  
• Reduction will push curve to left
  

  New Export Spending
  

• Exports=increased foreign demand for US goods
  

  National Income Abroad
  

• Encourages foreigners to buy more products
  
• Shift graph to left
  

  
  

  Aggregate Supply
  

• A schedule or curve showing the level of real domestic output that firms will produce at each price level
  

  
  

  Aggregate Supply in the Long Run
  

• Vertical at the economy's full-employment output
  
• Changes in the price level therefore do not change real profit and there is no change in real output
  
• Long-run aggregate supply curve: vertical at economy's potential output
  

  
  

  Aggregate Supply in the Short Run
  

• Short-Run aggregate supply curve: up-sloping