AD Notes

•  Aggregate Demand(AD): Shows the amount of real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level. The relationship between real price level and GDP is inverse.
• AD: The demand by consumers, business, government, and foreign countries. Changes in the price causes a move along the curve, not the shift of the curve. 

•          AD = C+I+IG+XN

• Three reasons for downward slope:

1. Wealth Effect - Higher price reduces purchasing power of money. This decreases the quantity of expenditures. Lower price levels increases purchasing power and increase expenditures. (e. if the balance in your bank account was $50000 but inflation erodes your purchasing power, you will likely reduce your spending. 
2. Interest-Rate Effect - As price level increases, lenders need to change higher interest rates to get real returns on their loans. Higher interest rates discourage consumer spending and business investments. (e. increase in prices tend to lead to an increase in the interest rate from 5% to 25. You are less likely to take out loans to improve your business.) Results... price level will go up, then GDP demand goes down vice versa.
3. Foreign Trade Effect - When U.S price level rises, foreign business purchase fewer U.S goods and Americans buy more foreign goods. Exports fall and imports rise causing real GDP demanded to fall. (Xn decreases) (e. if prices triple in the U.S, Canada will no longer buy U.S goods causing quantity demanded of U.S products to fall.

•  Shits in AD: 
• One, a change in C, Ig, G, Xn. 
• Two, a multiplier effect that produces a greater change than the original change in the four components.
• Increase in AD = AD Shifts right (-->)
• Decrease in AD = AD Shifts Left (<--)
• More government spending (AD--->)
• Less government spending (AD <---)

• Determinates:

1. Consumption (C)- change in consumer spending
1. Consumer wealth - boom in stock market
2. Consumer expectations - people fear recession
3. Household indebtness - more consumer debt
4. Taxes - decrease in income taxes 
2. Gross Private Investment (Ig) - Change in investment spending
1. Real interest rate - price of borrowing money, if interest rates increase/decrease
2. Future business expectations - high expectations
3. Productivity/Technology - new robots
4. Business Taxes - higher corporate taxes mean etc..
3. Government Spending (G) - Change in government spending 
1. War; Nationalized Healthcare
2. Decrease in defense spending 
4. Net Exports (Xn) 
1. Exchange rates - (If rates U.S dollar depreciates relative to the euro.)
2. National income compared to Abrod - (if the major importer has recession...)(If the U.S had a recession...)("if the U.S get a cold, Canada get pneumonia)

• AD = GDP = C + I + G + Xn