Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Economic bubble wikipedia , lookup
Monetary policy wikipedia , lookup
Economic democracy wikipedia , lookup
Exchange rate wikipedia , lookup
Pensions crisis wikipedia , lookup
Interest rate wikipedia , lookup
Business cycle wikipedia , lookup
Keynesian economics wikipedia , lookup
Intro to Aggregate Demand AP Macroeconomics Where we came from… There is an inverse relationship between interest rates and investment – as interest rates go up, investment goes down. Alternatively, as interest rates go down, investment rises. Thus, investors [most likely] enjoy low interest rates! Where we came from… As interest rates go down, investment rises. As investment rises, output increases. When output increases, so too does demand! Where are we going? In this lesson, you’ll learn about the aggregate demand. This lesson explains the factors that determine aggregate demand. Just as in earlier lessons in supply & demand, you must understand the difference between movement along, and shifts in, the supply & demand curves. A little bit o’demand… http://yadayadayadaecon.com/clip/46/ Aggregate Demand defined… Aggregate demand represents the sum of consumption (C), investment spending (I), government spending (G), and net exports (X-IM or NX) The quantity of real GDP demand is the total of all final goods and services that households, businesses, governments, and foreigners plan to buy. This is aggregate demand! Aggregate Demand •The aggregate demand function is inverse function between price level and output: as the price level rises, the level of output demanded decreases. •An increase in price from P to P1 results in a decrease in real GDP from Y to Y1 Visual 3.7, Unit 3 Macroeconomics, National Council on Economic Education, http://apeconomics.ncee.net Factors affecting aggregate demand… 1) 2) 3) Interest-rate effect Wealth-effect Net-export effect Let’s examine the things that make the curve downward sloping… Interest-rate effect Defined as the decrease in households’ and businesses’ plans to buy capital and consumer durables because a price level increase will increase the interest rate. Financial institutions raise the interest rate because, as price levels increase, purchasing power of money decreases. Wealth Effect Defined as the decrease in the real value of cash balances as the price level increases. When faced with a decrease in real wealth, people decrease consumption and increase savings to compensate for this loss. Net Export Effect Defined as the decrease in domestic output demanded with an increase in the domestic price level because domestic products are more expensive to foreign buyers and foreign goods are less expensive to domestic consumers. We’re better together… Combined, these three effects produce the downward sloping aggregate demand curve. These three reasons differ from those that create a downward sloping demand curve for a single commodity, as we saw in previous lessons! Understanding SHIFTS in aggregate demand… A decrease in expected future income, in government expenditures, in the money supply or an increase in taxes will cause the AD to shift from AD to AD1. An increase in expected future income, in government expenditures or in the money supply, or a decrease in taxes will cause the AD to shift from AD to AD2. Visual 3.8, Unit 3 Macroeconomics, National Council on Economic Education, http://apeconomics.ncee.net And now… Some resources: http://www.reffonomics.com/textbook2/macroec onomics2/keynesianthought/keynesiancross. swf Works Cited Economics of Seinfeld. Demand. http://yadayadayadaecon.com/clip/46/ Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers. Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print. Reffonomics. www.reffonomics.com.