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Determinants of Aggregate Demand
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Consumption, Gross Private Investment, Government Spending and Net Exports
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Consumption (Consumer Wealth)
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More wealth= More spending Less wealth= Less spending
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Consumption (Consumer Expectations)
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Positive expectation= More spending Negative expectation= Less spending
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Consumption (Household Indebtedness)
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Less debt= More spending More debt= Less spending
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Consumption (Taxes)
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Less taxes= More spending More taxes= Less spending
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Gross Private Investment (Real Interest Rate)
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Lower real interest rate= More investment Higher real interest rate= Less investment
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Gross Private Investment (Expected Return)
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Higher expected return= More investment Lower expected return= Less investment
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Government Spending
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More government spending= AD increase
Less government spending= AD decrease
Less government spending= AD decrease
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Net Exports (Exchange Rates)
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Strong $= More Imports and Fewer Exports Weak$= Fewer Imports and More Exports
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Net Exports (Relative Income)
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Strong Foreign Economies=More Exports Weak Foreign Economies= Less Exports
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Determinants of Short Run Aggregate Supply
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Input prices, Productivity, and Legal-Institutional Environment
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Input Prices (Foreign Resource Price)
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Strong $= lower Weak$= higher
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Input Prices (Market Power)
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Increases in resource prices= SRAS Increase Decrease in resource price= SRAS decrease
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Productivity
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More productivity= Lower unit production cost Less productivity= Higher unit production cost
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Legal-Institution Environment (Taxes and Subsidies)
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Taxes increase= SRAS increase Taxes decrease= SRAS decrease
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Legal-Institution Environment (Government Regulation)
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Government regulation= Decrease in SRAS Deregulation= Increase in SRAS
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3 Reasons AD is Downward Sloping
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Real Balances Effect, Interest Rate Effect, Foreign Purchase Effect
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Real Balances Effect
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When the price level is high, households and business cannot afford to purchase as much output
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Interest Rate Effect
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A higher price level increases the interest rate which tends to discourage investment
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Foreign Purchases Effect
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A higher price level increases the demand for relatively cheaper imports
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Key to Understanding SRAS Shifts
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Per Unit Cost of Production (Total input cost/ Total output cost )
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