3.1: Aggregate Demand

Question 1

Aggregate

Answer 1

“Added all together”

Question 2

Aggregate Demand

Answer 2

all the goods and services (real GDP) that buyers are willing and able to purchase at different price levels (C+I+G+Xn)

Question 3

What is the relationship b/tw price level & real GDP?

Answer 3

Inverse relationship
If price levels increase(inflation), then real GDP demands fall

If price levels decrease(deflation), then real GDP demands rise.

Question 4

AD is the demand of what beings?

Answer 4

consumers, businesses, gov., & foreign countries.

Question 5

The Wealth Effect

Answer 5

Higher price levels reduce the purchasing power of money. This decreases the quantity of expenditure.

Lower price levels increase purchasing power & increase expenditure
AKA: Real Balance Effect

Reason why the AD is downward sloping

Question 6

Higher Interest Rates

Answer 6

When price levels increase, lenders need to raise interest rates to get a REAL return on their loans

Higher interest rates discourage consumer and business spending.

Reason why AD is downward sloping

Question 7

Foreign Trade Effect

Answer 7

When U.S. price levels rise, foreign buyers purchase fewer American goods and Americans buy more foreign goods

Exports fall and imports rise causing real GDP demanded to fall

Reason why AD is downward slopping

Question 8

What are the shifters of AD

Answer 8

1. Change in Consumer Spending
   - Change in Disposable Income(Including Taxes)
   -Change in Comsumers Expectations
2. Change in Investment Spending
   - Change in Real Interest Rates (Price of Borrowing)
   Future Business Expectations
   Business Taxes
3. Change in Gov. Spending
   - Change in Gov. Expenditures
4. Change in Net Exports
   - Change in Exchange Rates
   - National Income Compared to Abroad

AD=GDP