2/16/2017

Aggregate Demand Curve

AD is the demand by consumers business, government and foreign countires
Changes in price level cause a move along the curve not a shift of the cruve

AD= C+I+G+Xn

The relationship between the price level and the level of real gap is inverse

3 Reason ( Why is AD downward sloping)
1. Wealth effect

• Higher prices reduce purchasing power of a dollar 
• This desires the quint of expenditures 
• Lower price level increase purchasing power and increase expenditures 

2. Interest-Rate effect

• As price level increase, lenders need to charge higher interest rate to get a real return on their loans 
• Higher interest rate discourage consumer spending and business investment 

3. Foreign Trade effect 

• When U.S price level rises, foreign buyers purchase fewer U.S goods and Americans buy more foreign goods 
• Export fall and import rise causing real GDP demanded to fall ( Xn decreases) 

Shifts in Aggregate Demand 

There are two parts to a shift in AD 

• a change in C,Ig,G, and/or Xn
• multiplier effect that produces a greater change than the original change on components 

Increase in AD= AD -> 

Decrease in AD=AD<-