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February 13, 2015
1.
2.
3.
4.
Collect Unit 1 Vocabulary
Unit 1 Exam Will Be Returned/Reviewed After Break!
Begin Unit 2- Notes on Aggregate Demand
Unit 1 Exam Results
1
Unit 2:
National Income and Price Determination
2
Demand
Aggregate Demand
4
Aggregate Demand
Aggregate means “added all together.”
Aggregate combines all prices and all quantities.
Aggregate Demand is all the goods and services (real GDP)
that buyers are willing and able to purchase at different
price levels.
The Demand for everything by everyone in the US.
There is an inverse (negative) relationship between
price level and Real GDP.
If the price level:
•Increases (Inflation), then real GDP demanded falls.
•Decreases (deflation), then real GDP demanded increases.
Aggregate Demand Curve
Price
Level
***WHEN YOU
LABEL AN AD/AS
GRAPH USE PRICE
LEVEL AND REAL GDP!
NOT P AND Q!***
AD is the demand by consumers,
businesses, government, and foreign
countries for domestic commodities..
What definitely doesn’t shift
the curve?
Changes in price level cause
a move along the curve!
AD = C + I + G + Xn
Real GDP (Real domestic output: GDPR)
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Why is AD downward sloping?
1. Wealth Effect
• Higher price levels reduce the purchasing
power of money.
• This decreases the quantity of expenditures
• Vice Versa
Example:
• If the balance in your bank was $50,000, but inflation
erodes your purchasing power, you will likely reduce
your spending. The quantity purchased is reduced.
• So…Price Level goes up, Real GDP demanded goes
down.
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Why is AD downward sloping?
2. Interest-Rate Effect
• When the price level increases, lenders
need to charge higher interest rates to
get a REAL return on their loans.
• Higher interest rates discourage
consumer spending and business
investment.
• Vice Versa
•
•
Example: An increase in price level leads to an increase in
the interest rate from 5% to 25%. You are less likely to take
out loans to improve your business.
Result…Price Level goes up, GDP demanded goes down 8
(and Vice Versa)
Why is AD downward sloping?
3. Net export effect
• When U.S. price level rises, foreign buyers
purchase fewer U.S. goods and Americans
buy more foreign goods.
• Exports fall and imports rise causing Real
GDP demanded to fall. (XN Decreases)
• Example: If prices triple in the US, Canada will no
longer buy US goods causing quantity demanded of
US products to fall.
• Again, Price Level goes up, GDP demanded goes
down (and Vice Versa)
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AP Economics
February 23, 2015
1.Quick Review…
2.Finish Lesson 2-1: Aggregate
Demand Shifters
3.Activity 3-1: Aggregate
Demand
Quick Lesson 3-1 Review…
1. What is AD?
2. Inverse Relationship between…
3. Movement from point to point along AD
curve caused by…
4. Why is AD curve downward sloping? (3)
Shifters of
Aggregate Demand
Shifts caused by Change in factor
other than Price Level!
GDP = C + I + G + Xn
Shifts in Aggregate Demand
An increase in spending shift AD right, and decrease in
spending shifts it left.
Price
Level
AD1
AD2
AD = C + I + G + Xn
GDPR (Real domestic output)
Shifters of Aggregate Demand
1. Change in Consumer Spending
Consumer Wealth (Boom in the stock market…)
Consumer Expectations (People fear a recession…)
Taxes (Decrease in income taxes…)
2. Change in Investment Spending
Business Investment is spending money on things that are used to
produce other things (plant, equipment, machinery, etc.)
Demand for product being produced?
Real Interest Rates (Price of borrowing $)
Future Business Expectations (High expectations…)
Productivity and Technology (New robots…)
Business Taxes (Higher corporate taxes means…)
Shifters of Aggregate Demand
3. Change in Government Spending
(War…)
4. Change in Net Exports (X-M)
Exchange Rates
(If the US dollar depreciates relative to the Euro, then to
Europeans American goods are cheaper, so US exports
rise and imports fall)
Changes in Foreign Income
Investment Specifics
• 2 Determinants of Investment:
1.Output (Demand for businesses’
product)
2.Interest Rate (Borrowing or investing
own $)