AP Economics

Mr. Bernstein

Module 17: Aggregate Demand: Introduction and

Determinants

March 10, 2015

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AP EconomicsMr. Bernstein

Aggregate Demand: Intro and Determinants• Objectives - Understand each of the following:• How the aggregate demand curve illustrates the

relationship between the aggregate price level and the quantity of aggregate output demanded in the economy• How the wealth effect and interest rate effect

explain the aggregate demand curve’s downward slope• What factors can shift the aggregate demand curve

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AP EconomicsMr. Bernstein

Aggregate Demand• The relationship between aggregate price level

demand and the aggregate quantity of output demanded (C + I + G + XN)

(notice labels …NOT P and Q)

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AP EconomicsMr. Bernstein

The AD Curve is Downward Sloping• NOT due to the

Law of Demand, whichis driven by substitutes

• “Wealth Effect”• When prices fall, purchasing

power rises, increasing C

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AP EconomicsMr. Bernstein

The AD Curve is Downward Sloping• “Net Export Effect”• Lower US prices increase XN

• “Interest Rate Effect”• Lower prices lead to lowerp expectations, which leadto lower nominal interestrates…which lead to increase in I

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AP EconomicsMr. Bernstein

AD Curve Shifters• D I, D C, D G or D XN

• D Expectations• D Wealth• D Existing Capital Stock• Ds in Fiscal, Monetary Policy• Signaling of future policy