AD slopes downward due to the wealth effect, interest rate effect, and net export effect
Determinants of AD (AD Shifters)
Changes in Consumer Spending (C)
| Factor | AD Shifts Right | AD Shifts Left |
|---|---|---|
| Consumer confidence | Increases | Decreases |
| Consumer wealth | Increases | Decreases |
| Personal income taxes | Cut | Raised |
| Consumer debt | Decreases (or easy credit) | Increases |
Changes in Investment (I)
| Factor | AD Shifts Right | AD Shifts Left |
|---|---|---|
| Interest rates | Fall | Rise |
| Business confidence | Increases | Decreases |
| Business taxes | Cut | Raised |
| Technology | Improves | — |
Changes in Government Spending (G)
| Factor | AD Shifts Right | AD Shifts Left |
|---|---|---|
| Government purchases | Increase | Decrease |
Changes in Net Exports (X - M)
| Factor | AD Shifts Right | AD Shifts Left |
|---|---|---|
| Foreign income | Rises (buy more exports) | Falls |
| Exchange rate | Dollar depreciates | Dollar appreciates |
| Relative price level | Falls (cheaper exports) | Rises |
Movement Along vs. Shift of AD
An increase in AD (e.g., tax cut, G increase) shifts the entire curve right