Aggregate Demand Lecture Notes

Definition

• Aggregate Demand (AD): Total demand for a country's goods and services at a given price level in a given time period.
• Expressed as total expenditure on goods and services within an economy.

Aggregate Demand Equation

• AD is calculated using the formula: AD = C + I + G + (X − M)
  • C: Consumer spending
  • I: Investment spending by firms on capital goods
  • G: Government spending
  • X: Export revenues
  • M: Import expenditure

Aggregate Demand Curve

• Downward Sloping: Demonstrates inverse relationship between price level and real GDP.
• Axes:
  • Y-axis: Price level (P)
  • X-axis: Real GDP (Y)

Why Does AD Curve Slope Downwards?

• Inverse relationship between price level and aggregate demand.

• Three Effects explain why AD curve slopes downward:

  1. Wealth Effect

  • Concept: Decrease in price level leads to an increase in purchasing power.
  • Result: Increased consumption (C) due to increased real wealth.
  • Impact: Extension/expansion of AD, increase in real GDP.

  2. Trade Effect

  • Concept: Decrease in price level makes exports more competitive, imports less competitive.
  • Result: Increase in export revenues (X) and decrease in import expenditure (M).
  • Impact: Increase in AD, increase in real GDP.

  3. Interest Effect

  • Concept: Lower price level can lead to lower interest rates.
  • Result: Higher consumption (C) and investment (I), and improved net exports (X - M).
  • Impact: Changes in AD due to interest rate variations.

Shifts in the Aggregate Demand Curve

• Occurs when there are changes in C, I, G, or (X - M) not related to price level changes.
• Reasons for Shifts:
  • Changes in consumer confidence, investment trends, government policies, or trade dynamics not linked to price level changes.
• Result: AD curve shifts right or left, affecting real GDP at constant price levels.

Conclusion

• Understanding the downward slope of the AD curve explains AD changes due to price level shifts.
• Future content will explore factors affecting C, I, G, and (X - M) independent of price level changes.
• Stay tuned for further videos on these topics.