Ch. 10.2 Aggregate Demand

Exchange Rate:

The amount of a foreign currency that you can buy with a U.S. dollar

Disposable Income =

Aggregate Income - (Taxes + Transfer Payments)

Monetary Policy:

Changing money supply and interest rates

Changes in Aggregate Demand:

1) Expectations 2) Fiscal policy and monetary policy 3) The world economy

Aggregate Demand Decreases If:

1) Expected future income, inflation, or profit decreases 2) Fiscal policy decreases government expenditure, increases taxes, or decreases transfer payments 3) Monetary policy decreases the quantity of money and increases interest rates 4) The exchange rate increases or foreign income decreases

Aggregate Demand Increases If:

1) Expected future income, inflation, or profit increases 2) Fiscal policy increases government expenditure, decreases taxes, or increases transfer payments 3) Monetary policy increases the quantity of money and decreases interest rates 4) The exchange rate decreases or foreign income increases

Buying Plans Depend On:

1) Price level 2) Expectations 3) Fiscal policy and monetary policy 4) The world economy

AD Curve Slopes Downward Because:

1) Wealth effect 2) Substitution effects

Substitution Effects:

1) When the price level rises and other things remain the same, interest rates rise because the real money supply in the economy falls 2) When prices increase but other things remains the same, domestic prices are not higher relative to international prices

Expectations:

Expectations of future incomes, inflations, profits

Fiscal Policy:

Government spending and taxes

International Substitution:

Higher domestic prices induce more imports and fewer exports

Intertemporal Substitution:

Higher interest rates induce households and firms to delay purchases

Wealth Effect:

When the price level rises but other things remain constant, real wealth decreases, leading to decreased consumption