AGGREGATE DEMAND

1

• AGGREGATEDEMAND
• Relationship between quantity of Real GDP
  demanded and the price level.
• C I G Xn

2
Aggregate Demand (AD)

• Inverse relationship
• At higher price level (P1), quantity demanded
  (Q1) is relatively low
• At lower price level (P2), quantity demanded (Q2)
  is higher

• AD Curve

Price
P1
P2
AD
Q1
Q2
Output
3
Aggregate Demand (AD)

• If aggregate demand (AD) increases,
• quantity demanded (Q2) increases for eachprice
  level (P1).

• AD Curve

P1
P2
AD
AD2
Q1
Q1
Q2
4
Aggregate Demand (AD)

• If aggregate demand (AD) decreases,
• quantity demanded (Q2) decreases for each price
  level (P1).

• AD Curve

AD3
P1
AD
Q1
Q1
5
Application Question

• Do Question 10 a) through c) on p. 100 in your
  text.
• You may work individually or in groups.

6
Level of AD

• If aggregate demand is lower than capacity Q
• output is low
• unemployment is high
• can cause recession

• AD Curve

AD
AS
P
Q
Capacity
7
Level of AD

• If aggregate demand is higher than capacity Q
• prices are high
• unemployment low
• further increases in demand cause much higher
  prices
• can lead to high inflation

• AD Curve

AS
P2
P
AD
Capacity
Q
8
Level of AD

• If aggregate demand is at or near capacity Q
• output is high
• unemployment is at a minimum
• economy in equilibrium

• AD Curve

AS
AD
P
Capacity
9
Demand Side

• Application Questions
• Do questions 8 and 9 in your text, p. 99.
• You may work individually or in groups.

10
Causes of Shifts in AD

• Consumer Spending (C) changes with
• Consumer wealth
• Personal Disposable Income Income - Taxes
• Consumer confidence
• how consumers feel about their future prospects
• ? confidence ? ? spending, ? savings
• ? borrowing for large purchases
• Household assets
• If asset values ?, more willing to spend

11
Causes of Shifts in AD

• Consumer Spending (C) changes with
• Household debt
• Low debt ? more willing to borrow
• Interest Rates
• ? interest rates ? less borrowing
• Major purchases
• Taxes

12
Causes of Shifts in AD

• 2. Investment Spending (I) changes with
• Interest rates
• Low interest ? ? borrowing (consumer and
  business)
• Profit expectations on investment projects
• Degree of excess capacity
• Business taxes
• Technology, competition

13
Causes of Shifts in AD

• 3. Government Spending (G)
• Changes in government policy
• Limited by
• Government revenues
• Ability / willingness to borrow
• Made up of
• Current spending, mostly wages and salaries
• Capital expenditures, 1 - 2 of GDP

14
Causes of Shifts in AD,

• 4. Net Exports (X) change with
• Relative economic conditions
• Exchange rates
• Canadian ? ? ? exports, ? imports
• ? Net exports ?

15
Effects of Shifts in AD

• Effect of shift depends where economy is on its
  aggregate supply (AS) curve.
• If AD is relatively low, output can increase
  substantially with only moderate price increases.

AD
AS
Price
AD2
Quantity
16
Effects of Shifts in AD

• Effect of shift depends where economy is on its
  aggregate supply (AS) curve.
• If AD is relatively high, any further increases
  in output will cause large price increases.

AS
Price
AD2
AD
Quantity