Interest Rate Effect

Aggregate Demand
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
What you
What is
This can be shown
on a schedule or
When price
levels rise, the
quantity of real
GDP demanded
The total value
of goods &
demanded at all
different price
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.
Play until 6 min. mark
Three effects of a price level
change impact the
downward slope of the AD
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
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
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?