Unit III: Aggregate Demand

Aggregate Demand (AD)→shows amount of RGDP that private, public, and foreign sectors collectively desire to purchase at each possible price level (relationship b/t PL and level of RGDP is inverse)

Link to AD graph

3 Reasons AD is downward sloping:
   
1. Real-Balance Effect

• when PL is ↑, households and businesses cannot afford to purchase as much output
• when PL is ↓, they can afford to purchase more output

2. Interest-Rate Effect

• a higher PL increases interest rate, which tends to discourage investment
• a lower PL decreases interest rate, which tends to encourage investment

3. Foreign Purchases Effect

• a higher PL increases demand for relatively cheaper imports
• a lower PL increases foreign demand for relatively cheaper U.S. exports

Shifts in AD (2 parts)

1. △ in C, Ig, G, or Xn
2. multiplier effect→produces a greater change than original change in 4 components

Increase in AD=shifts →

Decrease in AD=shifts ←

Govt Spending (e.g. schools, space programs)

• more: AD →
• less: AD ←

Net Exports

-sensitive to:

1. Exchange Rates (international value of $)

• strong $=more imports, fewer exports (AD ←)
• weak $=fewer imports, more exports (AD →) 

2. Relative Income

• strong foreign economies=more exports (AD →)
• weak foreign economies=less exports (AD ←)

3 Types of Aggregate Graphs: