Amshu Gautam Module_17 study guide

Amshu Gautam Module_17 study guide

1. Aggregate demand

   • Aggregate demand is the overall demand for final good and services in the economy.
   • Aggregate demand curve: It is the a downward sloping graph that shows the inverse relationship between price level and quantity demand for GDP.
   • Why is aggregate demand curve downward sloping? - The aggregate demand curve is downward sloping due to the wealth effect change in the aggregate price level and the interest rate effect change in aggregate price level.
     • The wealth effect of a change in the aggregate price level: It is the change in consumer spending caused by the altered purchasing power of consumer assets.
       • Higher prices reduce purchasing power
       • Low price levels increase purchasing power and increase expenditures.
       • Price level goes up as GDP demanded.
     • The Interest rate effect of a change in the aggregate price level: It is the change in investment and consumer spending caused by altered interest rates that result from changes in the demand for money.
       • As of price level increases, lenders need to charge higher interest rates to get the real return on their loans.
       • Higher interest rates discourage consumer spending and business investment.
   • GDP = C+I+G+X-IM
   • Shifts for aggregate demand curve
     • Changes in expectations: Consumers and firms are the essential factors for economic growth that could change the future. High expectations for economic growth could cause firms to invest more now, which shifts AD to the right. In another hand, Low expectations for economic growth could cause firms to invest less now, which shifts AD to the left.
     • Changes in wealth: The more money the individual has, the more they are likely to spend, which shifts AD to right.
     • Size of the Existing Stock of Physical Capital: If one has a more stock then they will less likely to spend, which will shift AD curve to left. If one has less stock then they will most likely to spend, which will shift AD curve to right.
     • Government policies and aggregate demand: Aggregate demand can be used to improve economic performance and can have a powerful influence on aggregate demand. It shifts AD curve due to 2 reasons monetary policy and Fiscal policy.
     • Fiscal policy: It involves the tax cut and government spending. If the government increase government spending, then Ad curve shifts to right. and if the government raises taxes, then AD curve shifts to left.
     • Monetary policy: It involves the higher interest rate and investment spending. for instance, if firms have a lot of money, they will willing to lend out, which is an effect to drive the interest rate at any given aggregate price level, which leads to higher investment spending and higher consumer spending.
   • Figure 17.1 shows the AD curve of the 1933 recession. The x-axis shows the total quantity of domestic goods and services demanded which was measured in 2005 where the Y-axis shows the aggregate price level which was measured by GDP deflator.