Aggregate Demand 583-585 Mr. Henry What is Demand? (Sept.) Combination of desire, ability, and willingness to buy a product What does scarcity force society to do? Make Choices! What to produce How to produce For whom to produce What you Know In September we discussed why there would be a shift in Demand. What were those reasons? Changes in prices of related goods cause shifts in demand. Changes in consumers' income cause a change in the demand for a good or service. The demand curve shifts as consumer preferences change. Although the current price of a good does not cause a shift in the demand curve, the future price of a good does cause a shift. For AD we will see movement along the AD curve and tomorrow a “shift” of the AD curve What you Know To Know about What you Want Aggregate Demand??? What is aggregate demand? This can be shown on a schedule or curve When price levels rise, the quantity of real GDP demanded decreases! The total value of goods & services demanded at all different price levels So the AD curve slopes downward because when the price of a product falls consumers purchase more (income effect) and buy more because it is less expensive than other goods (substitution effect)? Nope…when consumers pay lower prices for goods & services, less income flows to resource suppliers in the form of wages, rents, interest, and profits. Yes, it can slope down, but for other reasons. http://youtu.be/oLhohwfwf_U Play until 6 min. mark Three effects of a price level change impact the downward slope of the AD curve. Real-Balances Effect: A higher price level reduces the real value or purchasing power of the public’s accumulated savings balances. We feel poorer and the higher price level means less consumption spending. Interest Rate Effect: When we draw an AD curve, we assume that the supply of money in the economy is fixed. But when the price level rises, consumers nee more money for purchases & businesses need more money to meet their payrolls & to buy other resources. Welcome interest rates! So increasing demand for money & consequently the interest rate, a higher price level reduces the amount of real output demanded. Foreign Purchases Effect: When the U.S. price level rises relative to foreign price levels (and exchange rates do not respond quickly or completely), foreigners buy fewer U.S. goods and Americans buy more foreign goods. Exports fall and imports rise. Can you cite an example of the real-balances effect, interestrate effect, and foreign purchases effect?