WhyistheADCurveDownward Sloping?The interest-rate effect:how a change in the price level affectsinvestment ().Whenpricesrise,householdsandfirmsneedmoremoneytofinance buying and selling.This increase in demand for money causes the“price" of holdingmoney (the interest rate) to rise, discouraging firm investmentThe international-trade effect: how a change in the price levelaffects net exports (NX): When U.S. price levels rise, U.S. exports become more expensiveandimportsbecomerelativelycheaper.Fewerexportsandmoreimports means netexports fallsEach effect moves in the same direction:an increase in thepriceleveldecreases real GDP2015PearsonEducation,Inc.6
© 2015 Pearson Education, Inc. 6 Why is the AD Curve Downward Sloping? The interest-rate effect: how a change in the price level affects investment (I) • When prices rise, households and firms need more money to finance buying and selling. • This increase in demand for money causes the “price” of holding money (the interest rate) to rise, discouraging firm investment. The international-trade effect: how a change in the price level affects net exports (NX) • When U.S. price levels rise, U.S. exports become more expensive and imports become relatively cheaper. Fewer exports and more imports means net exports falls. Each effect moves in the same direction: an increase in the price level decreases real GDP
Shifts of the AD Curvevs.Movements along ItPrice level(GDPdeflatorTheaggregatedemandcurve2009 = 100)shows the relationship110between the price level and105real GDP demanded, holdingeverything else constant.A change in thepricelevel not$17.0172RealGDP(trllions of 2009 dollars)caused by a component ofreal GDP changing results ina movement along the ADPrice level(GDPdeflatorcurve.2009=100)Achangeinsomecomponentof aggregate demand, on the105other hand, will shift the ADcurve.AD$16.917.2RealGDP(trillionsof2009dollars)2015PearsonEducation,lnc
© 2015 Pearson Education, Inc. 7 Shifts of the AD Curve vs. Movements along It The aggregate demand curve shows the relationship between the price level and real GDP demanded, holding everything else constant. A change in the price level not caused by a component of real GDP changing results in a movement along the AD curve. A change in some component of aggregate demand, on the other hand, will shift the AD curve
AD shifts:Changes in Monetary PolicyA government policy change could shift aggregate demand.Thereare two categories of government policies here:1. Monetary policy: The actions the Federal Reserve takes tomanagethemoneysupplyandinterestratestopursuemacroeconomicpolicyobjectivesIfthe Federal Reserve causes interest rates to rise,investmentspending will fall; if it causes interest rates to fall, investmentspending will rise.shifts the aggregateAnincreasein...because...demand curve..Priceinterestrateshigherinterestratesraisethelevelcosttofirmsandhouseholdsofborrowing,reducingconsumptionandinvestmentADspending.D0RealGDPTable13.1Variables that shift theaggregate demand curve2015PearsonEducation,Inc.8
© 2015 Pearson Education, Inc. 8 AD shifts: Changes in Monetary Policy A government policy change could shift aggregate demand. There are two categories of government policies here: 1. Monetary policy: The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives. If the Federal Reserve causes interest rates to rise, investment spending will fall; if it causes interest rates to fall, investment spending will rise. Variables that shift the aggregate demand curve Table 13.1 shifts the aggregate An increase in. demand curve. because
ADshifts:ChangesinFiscalPolicy2.Fiscal policy: Changes in federal taxes and purchases that areintended to achieve macroeconomic policy objectives.Increasingordecreasingtaxesaffectsdisposableincome,andhenceconsumption. The government can also alter its level ofgovernmentpurchases.shifts the aggregateAn increase in..demand curve...because...Pricegovernment purchases areagovernmentpurchaseslevelcomponent of aggregatedemand.0RealGDPPriceconsumption spending fallspersonal incometaxeslevelwhen personaltaxesrise,andorbusinesstaxesinvestmentfallswhenbusinesstaxes rise.ADAD0Real GDPTable 13.1Variablesthatshifttheaggregatedemand curve9@2015Pearson Education,Inc
© 2015 Pearson Education, Inc. 9 AD shifts: Changes in Fiscal Policy 2. Fiscal policy: Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. Increasing or decreasing taxes affects disposable income, and hence consumption. The government can also alter its level of government purchases. Variables that shift the aggregate demand curve Table 13.1 shifts the aggregate An increase in. demand curve. because
AD Shifts:Changes inExpectationsHouseholds or firms could become more optimistic about the future,increasing consumption or investment respectivelyOf course, theopposite could also occur.shiftsthe aggregateAn increase in..demand curve..because...Pricehouseholds'expectationsconsumptionspendingleveloftheirfutureincomesincreases.ADAD0RealGDPPricefirmsexpectationsoftheinvestmentspending increaseslevelfutureprofitabilityofinvestment spendingAD,AD20RealGDPTable13.1Variables that shifttheaggregatedemandcurve10@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 10 AD Shifts: Changes in Expectations Households or firms could become more optimistic about the future, increasing consumption or investment respectively. Of course, the opposite could also occur. Variables that shift the aggregate demand curve Table 13.1 shifts the aggregate An increase in. demand curve. because