What Is Aggregate Demand?
Why AD Slopes Downward
1. The Wealth Effect (Real Balances Effect)
2. The Interest Rate Effect
3. The Net Export Effect (Exchange Rate Effect)
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
AP Exam Tips
- •
- •
- •
- •
- •
Common Mistakes
- •
- •
- •
- •