Unit 3

Shifters of Aggregate Demand

• There are two parts to a shift in AD:
• A change in C, Ig, G and/or Xn
• A multiplier effect than produces a greater change than the original change is the 4 components.
• Increases in AD = AD →
• Decreases in AD = AD ←
  

Determinants in AD

• Consumption
• Household spending is affected by:
• Consumer wealth
• More wealth = more spending (AD shifts →)
• Less wealth = less spending (AD shifts ←)
• Consumer expectations
• Positive expectation = more spending (AD shifts →)
• Negative expectation = less spending (AD shifts ←)
• Household indebtedness
• Less debt = more spending (AD shifts →)
• more debt = less spending (AD shifts ←)
• Taxes
• Less taxes = more spending (AD shifts →)
• More taxes = less spending (AD shifts ←)
• Gross Private Investment
• Investment Spending is sensitive to:
• The Real Interest Rate
• Lower Real Interest Rate = More Investment (AD →)
• Higher Real Interest Rate = Less Investment (AD ←)
• Expected Returns
• Higher Expected Returns = More Investment (AD →)
• Lower Expected Returns = Less Investment (AD ←)
• Expected Returns are influenced by
• Expectations of future profitability
• Technology
• Degree of Excess Capability (Existing Stock of Capital)
• Business taxes
• Government Spendings
• More Government Spending (AD →)
• Less Government Spending (AD ←)
• Net Exports
• Net Exports are sensitive to:
• Exchange Rates (International value of money)
• Strong $ = More Imports and Fewer Exports = (AD ←)
• Weak $ = Less Imports and More Exports = (AD →)
• Relative Income
• Strong Foreign Economies = More Exports = (AD →)
• Weak Foreign Economies = Less Exports = (AD ←)