1. Changes in Aggregate Demand

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

3. 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 $ 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.

4. 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

5. Shifters of the Aggregate Demand Curve

6. 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

7. 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.