Introduction to Aggregate Demand Flashcards
What is aggregate demand?
The total amount of real output (real GDP) that consumers, firms, the government, and foreigners want to buy at each possible price level, over a particular time period
What are the 4 similarities between aggregate demand and demand?
- Both curves are downward sloping
- Non-price determinants exist for both
- Decrease in both causes unemployment
- Increase in both leads to rise in price
What are the differences between aggregate demand and demand?
- Single product and specific buyer vs total output and all possible buyers
- Demand curve is downward sloping because of law of diminishing marginal utility, substitution effect, and income effect; aggregate demand is downward sloping because of wealth effect, interest rate effect, and international trade effect
What are the three reasons aggregate demand curve is downward sloping?
- Wealth Effect
- Interest Rate Effect
- International Trade Effect
What is wealth effect?
If the price level increases, the real value of wealth falls - vice versa.
- rise in price => people feel less affluent => cut back spending
- fall in price => people feel more affluent => increase spending
What is interest?
Payment from a borrower to a lender of an amount above repayment of the borrowed amount
What is interest rate effect?
Increase in price level => increase demand of money as consumers require more money => increase in rates of interest => increase in cost of borrowing => less money borrowed => less purchases made => decrease in quantity of output demand
*vice versa
What is the international trade effect?
If domestic prices are higher than foreign prices, exports decrease and imports increase, resulting in a lower net export
If domestic prices are lower than foreign prices, exports increase and imports decrease, resulting in a higher net export
