1 Aggregate Demand (AD): the economy- wide demand for goods and services. Aggregate demand curve relates aggregate expenditure for goods and services to the price level The aggregate demand curve slopes downward owing to price-level effects: – Wealth Effect (Real Wealth/Real Balances) – Interest Rate Effect – International Trade Effect (Substitution)

2 Why the Aggregate Demand Curve Slopes Downward: Wealth Effect

3 Interest Rate Effect

4 International Trade Effect

5 The Aggregate Demand Curve Changes in the price level result in changes in quantity demanded.

6 Factors that Affect AD Consumption – Income – Wealth – Interest Rates – Expectations – Demongraphics – Taxes Investment – Interest Rates – Technology – Cost of Capital Goods – Capacity Utilization AD = C + I + G + NX Government Spending Net Exports – Domestic & Foreign Income – Domestic & Foreign Prices – Exchange Rates – Government Policy

7 Shifts in Aggregate Demand

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10 Shifting Aggregate Demand Curve

11 Effects of a Change in Aggregate Demand Demand-pull inflation: rapid increases in AD outpaces the growth of AS  price level up (inflation).