1. Aggregate Demand Krugman Section 4 Module 17

2. Aggregate Demand Aggregate demand is NOT demand (single product—price and quantity--the curve is downward sloping because people will demand more at a lower price)

3. Is a schedule that shows the amounts of GDP & Price Level Shows an inverse relationship between price level and domestic output The explanation of the inverse relationship is not the same as for demand for a single product  Substitution effect doesn’t apply in the aggregate case, since there is no substitute for “everything”

4. Explanation of Inverse Relationship Real Balance Effect or Wealth Effect  As the PL falls, cash will buy more, so people will spend more, thus increasing real output.

5. Interest-Rate Effect  Lower interest rates can increase levels of certain types of spending (Ig)

6. Foreign Purchases Effect or Net Export Effect  when PL falls, other things being equal, US prices will fall relative to foreign prices, which will tend to increase spending on US exports (X) and also decrease import (M) spending in favor of US products

7. Determinants of A.D. The “other things” (besides price level) that can cause a shift or change in demand

8. 1. Changes in consumer spending (C), which can be caused by:  A. Consumer wealth – “Wealth Effect” of income (liquidity, inflation and “real” income)  B. Future expectations of wages and wealth  C. Levels of indebtedness and response to more purchases  D. Net income after tax payments

9. 2. Changes in investment spending (Ig), which can be caused by:  A. Interest rates or the cost of borrowing  B. Future profit expectations  C. Profit after taxes  D. Available technology and time to adjust to technology  E. Amount of unused capital

10. 3. Change in gov’t spending (G)  Spending on G and Services 4. Changes in net exports (Xn) unrelated to PL, which may be caused by:  Income abroad  Exchange rates Depreciation of the dollar encourages US exports  and discourages import buying

11. What shifts the A.D. Curve? PL GDPr AD AD3AD2

12. Determine whether each situation will cause an increase, decrease or no change in AD. Always start with AD. If the situation would cause an increase in AD, draw an  in column 1. If there is a decrease in AD, draw a . If there is no change, write NC. For each situation that causes a change in AD, write the determinate of the new demand curve in column 2. Move only one curve.

13. 1. Congress cuts taxes 2. Interest rates increase causing businesses to buy less new equipment. 3. Survey shows consumer confidence jumps 4. Price level falls. Foreigners buy our goods. 5. Productivity rises for the 4 th year 6. President cuts defense spending by 20%; no increase in domestic spending Situation change in AD Determinant

14. 1. Congress cuts taxes ↑C 2. Interest rates increase causing businesses to buy less new equipment. ↓Ig 3. Survey shows consumer confidence jumps ↑C 4. Price level falls. Foreigners buy our goods. ↑Xn 5. Productivity rises for the 4 th year NC 6. President cuts defense spending by 20%; no increase in domestic spending ↓G Situation change in AD Determinant