Consumer Spending
Cons Spending
Gp
Q of Inv
Xn
Gp
Xn
Q of Inv
Xn
Gp
Q of Inv
Consumer Spending
Gp
Q of Inv
Q of Inv
SHIFTS IN THE AD CURVE: If anything else besides the PL changes and causes either Consumption, Investment, Government Purchases, or Net Exports to change, the AD curve will shift. Shifts in the AD curve are called “Demand _(5)_”. _(5)_(s) come from changes in economics variables exogenous (external) to the graph (i.e., other than the price level).
Quantity of Consumption Spending
Cons. Spending
Consumption Spending
Consumption Spending
Consumption Spending
PL
Quantity of Investment Spending
Q of Inv
Q of Inv
Q of Inv
PL
The Interest Rate Effect: If the PL rises, demand for money increases, this increase in money demand (i.e., cash holdings) will put upward pressure on interest rates which will raise the cost of ____(4)____.
Quantity of Net Exports (X – M)
Xn
Xn
Xn
PL
The Foreign Purchases Effect:
As the PL rises inside a country (ceteris paribus), that country’s goods will become less competitive on the world market resulting in domestic exports decreasing and domestic imports increasing.
Why consumption changes when the price level changes
Why investment spending changes when the price level changes
Why net exports change when the
price level changes
Quantity of Aggregate Demand (in real terms)
(measured in the domestic currency [$s in US]
Cons. Spending
Price Level
Xn = 0
AD0
What could cause consumption to change at all price levels? Changes in…
1. consumer expectations, 2. Changes in wealth, 3. Changes in Disposable Income (think about changes in taxes and transfer payments due to Δs in _(7)_ policy).
What could cause investment to change at all price levels? Changes in….
1. Business expectations (ie Δs in the expected real rate of return of business projects), 2. the ___(8)___ (think Δs in monetary policy), 3. Changes in the excess capacity of businesses.
What could cause government purchases to change at all price levels? The government passing legislation to increase government purchases (ie using _(7)_ policy).
What could cause net exports to change at all price levels? Changes in….
1. The national _(9)_ of trading partners
2. The value of the domestic currency (if the currency depreciates, net exports [NX] __(10)__; if the currency appreciates, net exports [NX] __(11)__)
Actions of the Fed focused on changing the interest rate will cause the AD curve to shift
(called a demand _(5)_)
AD1
If the _(6)_ 🡩 the MS the interest rate will 🡫 causing investment to increase at all price levels.
A Shift in Aggregate Demand
↑ Inv.
↑ Inv.
↑ Inv.
↑ Inv.
The downward sloping AD curve. As the PL _(1)_, consumption, investment, and net exports decrease. Thus, increases in the _(2)_ cause movements leftward along the AD curve.
The Real Wealth Effect: If the PL rises, the value of a household’s wealth held in cash will _(3)_ purchasing power resulting in consumption falling.
The Aggregate Demand Curve (ie the Total Spending Curve)
+ Demand Shock
What SHIFTS AD….look down 🡫
Why the AD is Downwardly Sloping…look up 🡩
(Note: The value of net exports can be negative)
Application 1: Draw a graph of the AD curve. Show what would happen if the price level increased.
Application 2: List as many things you can that would change the components of AD (other than the price level):
C:
I:
Gp:
NX:
Application 3: Draw a graph of the AD curve. Show what would happen if housing prices began to fall across the United States.