Unit 3 (2/11/15)

Aggregate demand - shows amount of real GDP that private, public, and foreign sector collectively desire to purchase at each possible price level.

Relationship between price level and the level of real GDP is inverse.

Reasons why AD is downward sloping.
     - Real balance effect: 
When price level is high households and businesses cannot afford to purchase as much output. (Vice Versa)
     -Interest rate effect: 
Higher price level increase interest rule which tends to discourage investment. (Vice Versa)
     -Foreign purchase effect: 
Higher price level increases demand for relatively cheaper imports.
Lower price level increased the foreign demand for relatively cheaper U.S. exports.

Shifts in aggregate demand.
     - Change in C, Ig, G, and Xn
     - Multiple effect that produces a greater cange than the original change in 4 compounds

Increase in AD: Shifts to the right.
Decrease in AD shifts to the left.

     Consumption
Household spending is affected by...
  -Consumer wealth 
*More wealth: more spending AD shifts to the right.
*Less wealth: less spending AD shifts to the left.
  -Consumer expectation
*Positive expectations; more spending AD shifts to the Right.
*Negative expectations: less spending AD shifts to the left.
  -Household indebteners
*Less debt: more spending AD shits to the right.
*More debt: less spending AD shifts to the left.
  -Taxes
*Less tax: more spending AD shifts to the right.
*More tax: less spending AD shits to the left. r

     Gross private investment
Investment is sensitive to...
  -Real interest rate
*Lower interest rate: more investment AD shifts to the right,
*Higher interest rate: less investment AD shifts to the left.
*Higher expected returns: more investment AD shifts to the right.
*Lower expected returns: less investment AD shits to the left.
    Expected returns are influenced by
-Expectations of future profitability
-Technology
-Degree of excess capacity
-Business

     Government spending 
*More government spending AD shifts to the right.
*Less government spending AD shits to the left.

     Net exports
sensitive to...
  -Exchange rates (international vale of money)
*Strong: more imports and few exports AD shifts to the left.
*weak: Fewer imports and more imports Ad shifts to the right.
  -Relative income
*strong foreign economies: more exports AD shift to the right.
*Weak foreign economies: less exports AD shifts to the left.