hi everybody aggregate demand is the total demand for a country's goods and services at a given price level in a given time period that's a definition you need to know more so we use the equation don't we for aggregate demand remember aggregate demand is a measure of total expenditure on a country's goods and services expenditure so we are measuring the total spending taking place in an economy consumer spending c investment spending by firms that is the spending by firms on capital goods government spending and net export spending where x is the value of exports i.e export revenues and m is the value of imports i import expenditure always remember it's a measure of spending as aggregate demand okay not quantities spending okay when we draw an aggregate demand curve we draw it downward sloping like this where aggregate demand is c plus i plus g plus x minus m remember to label the axis right what we have price level and real gdp and on the y-axis we use p's on the x-axis we use y's to represent real gdp why does the aggregate demand curve slope downwards why when there is a fall in the price level is there an increase in aggregate demand or an extension of a d and therefore an increase in real gdp why when the price level increases does aggregate demand reduce there is a contraction of 80 and therefore a fall in real gdp why does that take place well there are three reasons why and we're going to look at all three in a second remember that the downward slope makes reference to the fact that there is an inverse relationship between the price level and real gdp there is an inverse relationship between the price level and the level of aggregate demand alright so these three effects link to purely how changes in the price level can affect one or more of these variables aggregate demand can only ever change if c i g or x minus m increase or decrease but if the aggregate demand curve is down with sloping it means aggregate demand is changing purely for reasons to do with the price level changing what is the wealth effect say the wealth effect says that as the price level decreases let's say from p1 to p2 the purchasing power of income now increases in real terms people are richer therefore they're more likely to spend money on goods and service in goods and services in the economy which will increase c so consumption increases but purely because the price level has changed therefore there'll be an extension or an expansion of aggregate demanding the economy and real gdp will increase for that reason that's the wealth effect the purchasing power of income increasing or decreasing when the price level changes and then affecting consumption the trade effect well let's take a fall in the price level again the trade effect states that as the price level decreases for example exports become more competitive and imports become less competitive if exports become more competitive there'll be a greater demand for exports and the revenues generated from exports will increase increasing x in this equation at the same time imports become less competitive because domestic goods and services are more competitive so there'll be less spending on imports which will reduce the value of m in the bracket so as a result purely of a change in the price level the value of x minus m will increase aggregate demand will increase therefore real gdp will increase we move along the curve vice versa if the price double increases that's the trade effect what about the interest effect well the interest effect states that as the price level decreases for example interest rates can be kept lower in the economy because most central banks will adopt interest rate policy to meet an inflation target so if inflation is low let's say a p2 then interest rates can be kept lower in the economy and lower interest rates stimulate higher consumption stimulates higher investment okay because the cost of borrowing is lower and it also reduces the value of the exchange rate which can then boost your net export performance in x minus m okay so the interest effect links purely as a result of a change in the price level which can then affect c i and x minus m as interest rates are lower or higher in the economy depending on what the change in the price level is so crucially all three effects explain why any of these variables in the ad equation will increase or decrease but because only of changes in the price level as a result we see either extensions of aggregate demand when the price level decreases or contractions of aggregate demand when the price level increases thus increasing or decreasing real gdp in the economy that is so important to take away guys so many students are very naive with why the aggregate demand co slopes downwards not anymore you can plug that gap so when does the aggregate demand curve shift well clearly the aggregate demand curve will shift when there is an increase or decrease in c i g and or x minus m but nothing to do with the price level changing independent of the price level so consumption increases or decreases for reasons not to do with changes in the price level same with i same with g same with x minus m nothing to do with changes in the price level so one price level aggregate demand can shift right or left yeah there are other reasons why c i g and x minus m are changing independent of the price level that's when we shift the aggregate demand curve and at the same price level you can see we can have higher or lower levels of aggregate demand and therefore higher or lower levels of real gdp and we're going to cover all those reasons in the next few videos so make sure you stay tuned and watch all those videos where i cover what factors independent of the price level can affect c i g and x minus m thank you so much for watching guys i'll see you all in those next videos