MACRO 10.2 Aggregate demand

disposable income

is aggregate income minus taxes plus transfer payments. an increase in disposable income increases aggregate demand because quantify of consumption good and services increases.

when the price level rises and other things remain the same, the quantity of real gdp demanded ____, a movement ______ along the AD curve.

decreases, up

when the price level rises and other things remain the same, real wealth _____

decreases.

expectation that increase aggregate demand today:

-increase in expected future income -increase in expected future inflation rate increase in expected future profits

Aggregate demand

-the amount of goods and services in the economy that will be purchased at all possible price levels - the relationship between the quantity of real GDP demanded and the price level. - a rise in the price level, other things remaining the same, decreases the quantity of real GDP demanded.

a change in any factor that influences buying plans other than the price level brings a change in aggregate demand. the main factors are: (4)

1. expectaitons 2. fiscal policy 3. monetary policy 4. the world economy

Why is the aggregate demand curve downward sloping? (3)

1. real wealth effect - when the price level falls, the assets of consumers increase due to increased purchasing power. they buy more stuff, real wealth goes up. opposite: when the price level goes up (inflation), purchasing power goes down and real wealth goes down. 2. interest rate effect - when price level goes up, people buy less but they also save less, which means less money to be lent out to borrowers. results in higher interest rates and less investment spending, reduced demand in quantity of goods demanded. opposite: if price levels fall, people are going to spend more and they are going to save more, resulting in more money to lend out to borrowers which decreases interest rates and increases investments and this increases quantity demanded. 3. exchange rate effect - when prices increase in one country, other countries don't want to buy those higher priced goods. they go buy from a different country so quantity demanded falls. opposite: when price levels fall, countries want to buy more from you due to being cheaper, which increases quantity demanded.

intertemporal substitution effect

A rise in the price level, other things remaining the same, decreases the real value of money and raises the interest rate. - as a result there is a substitution effect that involves changing the timing of purchases of capital and consumer goods.

Examples of monetary policy that decrease aggregate demand include​ _______.

a decrease in the quantity of money and an increase in interest rates

fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending. - making transfer payments, purchasing goods and services - example: a tax cute or increase in transfer payments (welfare payments) increase aggregate demand.

what shifts the aggregate demand curve left or right?

The shifters are C (Consumer expenditure), I (investment), G, (Government expenditure), X-M (Imports-exports). GDP = C + I + G + (X-M)

connection between the price level and the international substitution effect

When the price level​ falls, the international substitution effect creates a movement down along the demand curve. And when the price level​ rises, the international substitution effect creates a movement up along the demand curve.

interest rate effect

a change in price level, changes the amount of savings in the economy, which changes the interest rate, this leads to a change in borrowing and investment.

exchange rate effect

a change in price level, changes the amount that people from other countries are will and able to purchase.

real wealth effect

a change in the price level, changes the purchasing power of assets causing consumers to buy more (or less) goods and services.

aggregate demand is described by:

an aggregate demand schedule and an aggregate demand curve.

a rise in the price level _____ the real value of the money in peoples pockets and bank accounts.

decreases

if the price level rises, real wealth ___. people then tend to try to restore their wealth. to do so they must increase saving, decrease consumption. as the price level rises, the decrease in consumption expenditure _________ the quantity of real GDP demanded

decreases decreases

when the price level falls and other things remain the same, the quantity of real GDP demanded ______, a movement _____ along the AD curve.

increases, down

When the government of Canada cuts income​ taxes, Canada's aggregate demand​ _______. When the United States experiences strong economic​ growth, Canada's aggregate demand​ _______.

increases; increases

real wealth

is the amount of money in the bank, bonds, shares, and other assets that people own, measured not in dollars but in terms of the goods and services that the m money, bonds, and shares will buy.

The aggregate demand curve slopes downward because​ _______.

of the wealth effect and the substitution effect When the price level rises but other things remain the​ same, real wealth decreases. People then try to restore their wealth. To do​ so, they must increase saving and decrease current consumption. When the price level rises and other things remain the​ same, interest rates rise. A rise in the price level decreases the real value of the money in​ people's pockets and bank accounts. With a smaller amount of real money​ around, banks and other lenders can get a higher interest rate on loans. But faced with higher interest​ rates, people and businesses delay plans to buy new capital and consumer durable goods and cut back on spending. This substitution effect involves substituting goods in the future for goods in the present and is called an intertemporal substitution effect.

The aggregate demand curve shows the relationship between the quantity of real GDP demanded and​ ______ when everything else remains the same.

price level

the quantity of real GDP demanded (Y) is the sum of:

real consumption expenditure (C), investment (I), government expenditure (G), and exports (x) minus imports (M) Y=C+I+G+X-M

Aggregate demand is the relationship between the quantity of​ _____ demanded and the​ _____ when all other influences on expenditure plans remain the same.

real​ GDP; price level

monetary policy

the bank of Canadas attempt to influence the economy by changing interest rates and the quantity of money. - an increase in the quantity of money increases aggregate demand through two main channels: it lowers interest rates and makes it easier to get loans.

two main influences that the world economy has on aggregate demand are:

the exchange rate and foreign income - a rise in the exchange rate decreases aggregate demand. - an increase in foreign income increases canadian exports, which increases canadian aggregate demand.

A movement along the aggregate demand curve occurs if​ _______.

the price level changes and all other factors remain unchanged

the quantity of real gdp demanded is:

the total amount of final goods and services produced in canada that consumers, businesses, and governments in Canada and around the world plan to buy.

Disposable income is aggregate income minus taxes plus ​ _____

transfer payments

second substitution effect: international prices

when the Canadian price level rises and other things remain the same, canadian made goods and services become more expensive relative to foreign made goods and services. this change in relative price encourages people to spend less on canadian made goods and more on foreign made goods.

Aggregate demand​ _______ when an increase in interest rates occurs. Aggregate demand​ _______ when an increase in government expenditures occurs.

​decreases; increases

The decrease in investment​ _______ aggregate demand. The decrease in imports​ _______ aggregate demand.

​decreases; increases