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| Chapter 11 Aggregate Demand--Schedule/Curve showing the real output that buyers collectively desire to purchase at each possible price level --When price level increases, demand decreases (substitution effect- where more of a specific product is purchased b/c it becomes cheaper relative to all other products) --There is no overall substitution effect among domestically produced goods when the price level falls Aggregate Demand Curve Downsloping * Real Balances Effect--when price level falls, the purchasing power of existing financial balances (savings accts, bonds) rises. A higher price level diminishes the value of financial balances. * Interest Rate Effect-- higher demand for money means higher interest rates. A decline in price level means lower interest rates which can increase levels of only certain types of spending. *Foreign Purchases Effect-- when U.S. price level rises relative to foreign price levels, foreigners buy fewer U.S. goods (=fewer exports) & Americans buy more foreign goods (=more imports). Determinants of Aggregate Demand 1. Consumer Spending <--less, more--> a. Consumer Wealth, change in real value of b. Consumer Expectations about the future c. Household Indebtedness d. Taxes 2. Investment Spending- purchasing capital goods. <--decline, increase--> a. Real Interest Rate- from a change in the nation's $ supply. b. Expected Returns due to: --expectations about future business conditions --technology- new & improved (ex: internet, railroad) --degree of excess capacity-(too much inventory, useless employees) --business taxes (will reduce profit, just like personal taxes) 3. Government Spending- the more $ govt puts into econ, the more beneficial 4. Net Export Spending- (higher exports = higher demand for U.S. goods) --National Income Abroad- if foreign income rises, they buy more US goods --Exchange rates may effect US net exports, and therefore AD Aggregate Supply |