Changes in Aggregate Demand

Aggregate Demand Curve: Slope Aggregate Price Level The aggregate demand curve is downward sloping. Why? AD1 Real GDP

The Downward Slope of the Aggregate Demand Curve Wealth (or real balance) effect As aggregate prices fall, the purchasing power of existing financial assets increases. The items on the “Value Menu” at McDonalds go from $1 to $0.10. What happens? Interest rate effect Lower prices mean lower interest rates. Why? Lower prices means increased purchasing power (lower demand for money). Lower demand for money lowers interest rates. Lower interest rates = higher investment. Higher investment = higher rGDP.

Aggregate Demand Curve: Shifts in the Curve Aggregate Price Level Right shift of the aggregate demand curve = increase in aggregate demand The aggregate demand curve is downward sloping. Left shift of the aggregate demand curve = decrease in aggregate demand --What causes shifts in the aggregate demand curve? --Remember, shifts to the aggregate demand curve change aggregate demand at any given aggregate price level (aggregate price do NOT change if the curve shifts). AD3 AD1 AD2 Real GDP

Shifters of the Aggregate Demand Curve

Government and Shifting Aggregate Demand The Role of Fiscal Policy: Direct and indirect effects The Role of Monetary Policy: The quantity of money and its effects

How is Aggregate Demand (AD) affected? Brief (5 words) description of the scenario Movement along the curve (up or down) OR shift in the curve (direction?) Provide a graph to illustrate, and CATEGORIZE THE SHIFT 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 the 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 record-high levels of value. The stock of physical capital has been falling for nearly a year.