2 Aggregate DemandJust 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 economyIn 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 constantCeteris Paribus
5 Why does it slope downward? Wealth EffectHigher prices reduces purchasing powerConsumer spending falls when prices riseInterest Rate EffectPrice level affects interest ratesAs prices rise, people need to save more moneyIncreased interest rates = lower Investment spending
7 Shift in Aggregate Demand Changes in ExpectationsGreater optimism leads to more spending at any given price levelChanges in WealthAs household assets increase in value, people feel free to spend more at any given price level
9 Shift in Aggregate Demand Size of existing stock of physical capitalIf stock of existing physical capital is large, business will not have to spend as much to meet increasing salesAggregate demand falls
10 Government Policy Fiscal Policy Monetary Policy Government spending and tax policyIn response to a recession, governments often increase spending and/or decrease taxesSpending = directTaxes = indirectMonetary PolicyThe size of the money supply can reduce or increase cost of borrowingFederal 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 monthsThe stock market has reached new records high levels of value.The stock of physical capital has been falling for nearly a year.