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Notes5-6 - Aggregate Demand the relationship between the...

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Aggregate Demand: the relationship between the economy’s price level and the total value of the final goods and services that everyone is willing to purchase Has an inverse relationship (price level rises, and the output demanded falls) o Wealth effect: an increase in the price level leads to a decrease in the real value of a household’s wealth o Interest rate effect: when price level increases, people need more money to purchase goods/services. This increase in the demand pushes interest rates up, which decreases consumption by households o Foreign purchases effect: higher price level affects imports and exports, which decreases aggregate demand Things that can increase aggregate demand (demand curve shifts right) o Increase in household wealth o Cutting taxes o Expectation that sales will increase o Decrease in stock of physical capital o Increase in supply of money Things that can decrease aggregate demand (demand curve shifts left) o Tax increase o More pessimistic expectations o
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