Aggregate Demand (AD)

Aggregate Demand

• Shows the amount of real GDP that the private public and foreign sector collectively desire to purchase at each possible price level
• The relationship between the price level and the level of real GDP is inverse

Aggregate Demand Curve




Three Reasons AD is downward sloping

Real-Balance Effect

• When the Price-level is high household and businesses cannot afford to purchase as much out put.
• when the price-level is low households and businesses can afford to purchase more output

Interest Rate Effect

• A higher price level increases that interest rate which tends to discourage investment
• a lower price level decreases the interest rate which tends to encourage investment

Foreign-Purchase Effect

• A higher price level increases the demand for relatively cheaper imports
• A lower price level increases the foreign demand for relatively cheaper U.S exports

Shifts in Aggregate Demand (AD)

• There are 2 parts to shirts in AD
• - change in C, Ig, G, and/or Xn
• - multiplier effect that produces a greater change than the 4 components
• -- increases in AD= AD ->
• -- decreases in AD= AD <-

Increases in Aggregate Demand

Decreases in Aggregate Demand