1. Aggregate Demand AD=CIGXn

2. AD =CIGXnConsumption Main determinant is income Other determinants: – Wealth (value of assets) if W C S – Expectations (for TT% or future wealth) – Debts (if D increases, C & S will decrease) – Taxes (if T increase, C & S decrease, etc)

3. AD =CIGXn Investment Investment is: – Business spending for capital stock – Most volatile component of AD/GDP – Assumed to require a loan – Decisions are based on MC (i%) vs. MB(exp Rate of Ret)

4. AD =CIGXn Government Spending More Government Spending (AD  ) Less Government Spending (AD  )

5. AD =CIGXn Net Exports Xn are sensitive to: TrIPS – Taste/real interest rates/Investment/Price level/Speculation SID = More M and Fewer X = (AD  ) WES = Fewer M and More X = (AD  ) LUKE, Use the FOREX

6. Changes (Δ) in AD Δ Consumption (C) – C↑.: AD .: GDP R ↑ & PL↑.: u%↓ & π%↑ – C↓.: AD .: GDP R ↓ & PL↓.: u%↑ & π%↓ Δ Gross Private Investment (I G ) – I G ↑.: AD .: GDP R ↑ & PL↑.: u%↓ & π%↑ – I G ↓.: AD .: GDP R ↓ & PL↓.: u%↑ & π%↓ Δ Government Spending (G) – G↑.: AD .: GDP R ↑ & PL↑.: u%↓ & π%↑ – G↓.: AD .: GDP R ↓ & PL↓.: u%↑ & π%↓ Δ Net Exports (X N ) – X N ↑.: AD .: GDP R ↑ & PL↑.: u%↓ & π%↑ – X N ↓.: AD .: GDP R ↓ & PL↓.: u%↑ & π%↓

7. Increase in AD C↑, I G ↑, G↑ and/or X N ↑.: AD .: GDP R ↑ & PL↑.: u%↓ & π%↑ GDP R PL AD SRAS LRAS YFYF P Y AD 1 P1P1   

9. Decrease in AD C↓, I G ↓, G↓ and/or X N ↓.: AD .: GDP R ↓ & PL↓.: u%↑ & π%↓ GDP R PL AD SRAS LRAS YFYF P Y AD 1 P1P1   

10. If the G has a balanced budget They are spending = to taxes collected If they increase spending and don’t have a balanced budget = borrowing It will come from the loanable funds market, therefore raising the r% by crowding us out.

11. If AD goes down Transfer payments will increase b/c the increase in u% will lead to more people applying for welfare and other benefits.

12. Extra determinates of AD ▲ ’s consumer confidence if we have optimism then AD> ▲ ’s in wealth – assets value > then AD > ▲ ’s monetary policy – if the Fed > MS then AD>

13. AD Summary AD reflects an inv rel beetw PL and GDP R Δ in PL creates real-balance, i%, and foreign purchase effects that explain AD’s downward slope Δ in C, I G, G, X N cause Δ in GDP R bc they Δ AD. Increase in AD = AD  Decrease in AD = AD 

14. Full Employment Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point. GDP R PL AD SRASLRAS YFYF P

15. Recessionary Gap A recessionary gap exists when equilibrium occurs below full employment output. GDP R PL AD SRAS LRAS YFYF P Y

16. Inflationary Gap An inflationary gap exists when equilibrium occurs beyond full employment output. GDP R PL AD SRASLRAS YFYF P Y

17. Increase in AD = Up/left movement along SRPC C↑, I G ↑, G↑ and/or X N ↑.: AD .: GDP R ↑ & PL↑.: u%↓ & π%↑.: up/left along SRPC GDP R PL AD SRAS LRAS YFYF P Y AD 1 P1P1    SRPC π u π% u%unun π 1π 1   ....

18. Decrease in AD = Down/right along SRPC C↓, I G ↓, G↓ and/or X N ↓.: AD .: GDP R ↓ & PL↓.: u%↑ & π%↓.: down/right along SRPC GDP R PL AD SRAS LRAS YFYF P Y AD 1 P1P1    u% π% SRPC unun π u π1π1   ....

19. Other Details: RATCHET EFFECT (or “ sticky wages ” ) – Prices don ’ t always go down when AD shifts left due to: wage contracts, worker morale, minimum wage laws, “ menu costs ” – costs to change prices up & down frequently & fear of “ price wars ” with competition. SHORT RUN – period when wages & other costs are FIXED (suppliers need time to adjust to change in AD/AS)