Download Module 17 Notes

Module 17 Notes
2 effects that help explain the reason that the Aggregate Demand (AD) curve is
down sloping.
The Wealth Effect -- At higher price levels the purchasing
power of assets such as savings is worth less; consumers feel
less well off and thus spend less, demanding fewer final
goods and services (GDP).
The Interest Rate Effect- At higher price levels people need
to increase their money holdings to purchase the same basket
of goods. There is an increased demand for money which
drives up the price paid for its use, interest rates, causing BI
to decrease. This contributes to a lower level of aggregate
demand for final goods and services.
These are the factors or determinants of Aggregate Demand and the components
of AD they affect.( C, I, G X or IM).
a.) Change
in expectations –
Affects Consumer Spending and Business Investment
components of Aggregate Demand.
More optimism – Increases spending and Aggregate Demand
Less optimism – Decreases spending and Aggregate Demand
b.) Changes
in Wealth –
Affects Consumer Spending component of Aggregate
Demand.
When the real value of household assets increase (financial
investments or real estate values increase), purchasing power
and consumer spending increases leading to an increase in
Aggregate Demand.
When the real value of household assets decrease (financial
investments or real estate values decrease), purchasing power
and consumer spending decreases leading to a decrease in
Aggregate Demand.
c.) Size
of stock of existing physical capital
Affects Business Investment component of Aggregate
Demand.
The more physical capital businesses already have, the less
incentive they’ll have to spend on more capital, leading to a
decrease in Aggregate Demand.
The less physical capital businesses have, assuming there is
optimism about future sales, the more incentive they’ll have
to spend on more capital, leading to an increase in Aggregate
Demand.
d.) Fiscal
Policy
The use of either government spending or tax policy to
stabilize the economy
Change in Taxes – affects Consumer Spending component of
Aggregate Demand.
Change in Government Spending – affects Government
Spending component of Aggregate Demand.
Expansionary Fiscal Policy -- taxes and/ or government
spending --  Aggregate Demand
Contractionary Fiscal Policy -- taxes and /or government
spending --  Aggregate Demand
e.)
Monetary Policy
Changes in the money supply and interest rates (i) to stabilize
the economy. This policy is conducted by the Federal
Reserve (our Central Bank)
Affects Consumer Spending (sectors sensitive to interest
rates such as autos, furniture, appliances) and Business
Investment components of Aggregate Demand.
Expansionary Monetary Policy -- i   Consumer
Spending, Business Investment  Aggregate
Demand
Contractionary Monetary Policy -- i  Consumer
Spending, Business Investment  Aggregate
Demand