Aggregate Demand shows the amount of Real GDP that private, public, and foreign sector collectively desire to purchase at each possible price level. The relationship between the price level and the level of real GDP is inverse.
Why is AD downward slopping?
2. Interest Rate Effect
3. Foreign Purchases Effect
What are the shifts in AD?
Consumption, Ig, Government Spending, and/or Xn
When there is more government spending, AD -->
When there is less government spending, AD <---
FULL EMPLOYMENT
Full employment equilibrium exists where AD intersects SRSA & LRAS at the same point.
Finding APC, APS, MPC, MPS
APC + APS = 1
1 - APC = APS
1 - APS = APC
APC > 1 .: Dissaving
APC = C/DI = % of DI not spent
MPC + MPS = 1
1 - MPC = MPS
1- MPS = MPC
Multiplier = Change in AD/Change in Spending
Multiplier = 1/1-MPC or 1/MPS
Fiscal Policy
Contractionary: Government Spending (UP), Taxes (DOWN)
Expansionary: Government Spending (DOWN), Taxes (UP)
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