1. Aggregate Demand
Module 17

2. Aggregate Demand
Just as we can determine a demand curve for a particular good or service, we can also determine an Aggregate Demand Curve that represents demand in the macro economy
In this case, it is the demand for a certain level of output (GDP) at a particular price level

4. Why does it slope downward?
Not the same as Law of Demand, where quantity demanded for a good changes with price of a good, all other prices being held constant
Ceteris Paribus

5. Why does it slope downward?
Wealth Effect
Higher prices reduces purchasing power
Consumer spending falls when prices rise
Interest Rate Effect
Price level affects interest rates
As prices rise, people need to save more money
Increased interest rates = lower Investment spending

6. Figure The Aggregate Demand Curve Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

7. Shift in Aggregate Demand
Changes in Expectations
Greater optimism leads to more spending at any given price level
Changes in Wealth
As household assets increase in value, people feel free to spend more at any given price level

8. Figure Shifts of the Aggregate Demand Curve Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

9. Shift in Aggregate Demand
Size of existing stock of physical capital
If stock of existing physical capital is large, business will not have to spend as much to meet increasing sales
Aggregate demand falls

10. Government Policy Fiscal Policy Monetary Policy
Government spending and tax policy
In response to a recession, governments often increase spending and/or decrease taxes
Spending = direct
Taxes = indirect
Monetary Policy
The size of the money supply can reduce or increase cost of borrowing
Federal Reserve System

11. What Happens to Aggregate Demand?
Business owners are less optimistic about the health of the economy.
The government decreases welfare and veteran’s benefits.
The Federal Reserve increases interest rates.
A rising price level decreases the value of money held for purchases.
The government lowers personal income taxes.
Consumers expect the job market to be much stronger in the next few months
The stock market has reached new records high levels of value.
The stock of physical capital has been falling for nearly a year.