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Howdocigandnxchangewithprice whydoesadslopedown

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Unformatted text preview: Demand by all sectors of economy Households, Firms, Government, International C, I, G, (X­M) How does aggregate quantity change with price? How do C, I, G, and NX change with price? Why Does AD Slope Down? Why Does AD Slope Down? Households: wealth effect on consumption – As price level rises, the value of its assets falls – With less wealth, consumption spending falls – Have contrary effects if hyperinflation exists Firms: interest rate effect on investment – As price rises we need more money for transactions – Firms want to borrow more & households want to save less – Interest rate rises and investment falls International trade effect: NX falls – Imports rise when domestic prices rise – Exports fall when domestic prices rise Why Does AD Shift? Why Does AD Shift? Changes in fiscal policy – Set by Congress and the Treasury Changes in monetary policy – Set by the Central Bank (Federal Reserve System) Changes in expectations – Especially about GDP Changes in “foreign variables” What ha...
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