Lecture Notes: Aggregate Demand

Definition

• Aggregate demand is the total demand for a country's goods and services at a given price level in a given time period.
• It measures total expenditure on a country's goods and services.

Components of Aggregate Demand

• Consumer Spending (C): Spending by households and individuals.
• Investment Spending (I): Spending by firms on capital goods.
• Government Spending (G).
• Net Export Spending (X - M):
  • Exports (X): Export revenues.
  • Imports (M): Import expenditure.

Aggregate Demand Curve

• Drawn downward sloping.
• Equation: AD = C + I + G + (X - M)
• Axes:
  • Y-axis: Price Level (P)
  • X-axis: Real GDP (Y)

Reasons for Downward Slope

• Inverse Relationship: Between price level and real GDP.
• Aggregate demand changes due to price level changes, affecting C, I, G, or (X - M).

Effects Explaining the Downward Slope

1. Wealth Effect:
   • As price level decreases, purchasing power increases.
   • Leads to an increase in C (consumption).
   • Results in extension or expansion of aggregate demand.
2. Trade Effect:
   • Lower price level makes exports more competitive and imports less competitive.
   • Increases export revenues (X) and decreases import expenditure (M).
   • Results in increased aggregate demand and real GDP.
3. Interest Effect:
   • Lower price levels allow for lower interest rates.
   • Stimulates higher consumption (C) and investment (I).
   • Boosts net exports (X - M) via a lower exchange rate.

Shifts in Aggregate Demand Curve

• Shifts occur due to changes in C, I, G, or (X - M) that are independent of price level changes.
• Can shift right or left, indicating higher or lower aggregate demand and real GDP at the same price level.

Conclusion

• Understanding why the aggregate demand curve slopes downwards is crucial.
• Future videos will cover factors affecting C, I, G, and (X - M) independent of price level changes.