Macroeconomics

Aggregate Demand Curve

• Ad is demanded by consumers, businesses, government, and foreign countries.
• Talks about total. Determinants will be different.
• Changes in price level cause they move along the curve not a shift of the curve.

Aggregate Demand (AD)

• Relationship between the price level and the level of real GDP is inverse.
• 3 reasons why AD is going down
1. Higher prices reduce purchasing power of $. This decreases the quantity of expenditure. Wealth Effect.
2. As price level increases, lenders need to charge higher interest rates to get a REAL return on their loans. Higher interest rates discourage consumer spending and business investment. Interest - Rate effect.
3. When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods. Exports fall and imports rise causing real GDP demanded to fall. Foreign Trade effect.

Shifts in Aggregate Demand (AD)

• Two parts to a shift in AD
• A change in C, Ig, G, and Xn
• A multiplier effect that produces a greater change than the original change in the 4 components.
• Increase in AD=AD ->
• Decrease in AD=AD<-

Determinants of AD

• Consumption
• Gross Private Investment
• Government Spending
• Net Exports

Change in consumer spending

• Consumer wealth
• Consumer expectations
• Households indebtedness
• Taxes

Change in investment spending

• Real interest rates
• Future business expectations 
• Productivity and Technology
• Business Taxes

Change in government spending

• War
• Health care
• Defense

Change in Net Exports

• Exchange rates
• National income compared to abroad

AD = GDP =C+Ig+G+Xn

"if the US get a cold, Canada gets pneumonia"

Government Spending

• More govt. spending (AD ->)
• Less govt. spending (AD<-)

Disposable Income (DI)

• Income after taxes or net

2 Choices

• Consume or save
• With disposable income, households can consume or save.

Consumption

• Household spending
• The ability to consume is constrained by amount of disposable income or the propensity to save

APC=C/DI=%DI that is spent

Household consume if DI=0

• Dissaving or Autonomous consumption

Saving

• Household not spending
• Ability to save is constrained by amount of disposable income and propensity to consume
• Households save if DI=0
• NO
• APS=S/DI=%D that is not spent

APC & APS

• APC+APS=1
• 1=APC=APS

MPC and MPS

• Marginal propensity to consume
• C/DI
• % of every extra dollar earned that is spent
• S/DI
• %of every extra dollar earned that is saved
• MPC+MPS=1
• 1-MPC=MPS
• 1-MPS=MPC

Determinants of C&S

• Wealth
• Increase
• Decrease