Aggregate Demand Flashcards
Aggregate demand curve def
Shows level of real GDP purchased by C+I+G+(X-M) at different possible prices during a time period.
Effect of decrease in price on AD curve
Increase
Increase in real GDP demanded
Axes of AD curve. Vertical + Horizontal
Vertical: price with CPI
Horizontal: real GDP
Why does AD downward slope
As price increases= consumer purchasing power declines so they purchase less.
Causes real GDP to fall, which decreases AD curve
Net Export Effect on AD curve
Price increase = Consumer purchasing power declines.
Domestic products are more expensive than foreign products, so consumers purchase more foreign products.
Causes real GDP to fall, which decreases AD curve
Interest rate effect on AD curve
Price increases = higher interest rates so consumers take out loans. Lowers I.
Decreases AD curve
Non-price determinants of AD, what happens when they change
C (tax cut, confidence)
I (profits, expectation)
G (fiscal policy)
Net exports (X-M) (expectations, tech, USD held by foreign countries)
Change in these aggregate expenditures creates a shift of AD curve
Effects of increase in non-price determinants of AD curve
Increase in the AD curve
Effects of decrease in non-price determinants of AD curve
Decline in the AD curve
Trade deficit def
Amount by which M exceeds X
Why trade deficit bad
Uses foreign assets to finance current goods and services. Bad for future production
Why trade deficit good
It’s only consumption, good means rising consumption
Capital assets for C & I def
C: Significant pieces of property
I: Asset useful longer than a year
AD curve shifts due to changes in (5)
C, I, G, (X-M)
