AP Macroeconomics Flashcards: Aggregate Demand (AD)
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Define the aggregate demand (AD) curve.
The aggregate demand (AD) curve describes the relationship between the price level and the quantity of goods and services demanded by households, firms, government, and the rest of the world.
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Define the aggregate demand (AD) curve.
The aggregate demand (AD) curve describes the relationship between the price level and the quantity of goods and services demanded by households, firms, government, and the rest of the world.
What explains the negative (downward) slope of the AD curve?
The negative slope of the AD curve is explained by three key factors: the real wealth effect, the interest rate effect, and the exchange rate effect.
What are the four components of aggregate demand?
The four components of aggregate demand are consumption (C), investment (I), government spending (G), and net exports (NX).
Explain the exchange rate effect.
The exchange rate effect posits that a lower price level leads to lower interest rates, causing the domestic currency to depreciate, which in turn stimulates net exports.
Explain the real wealth effect.
The real wealth effect states that as the price level falls, the real value of money increases, which boosts consumer spending and thus the quantity of goods and services demanded.
If the government decides to increase spending on new infrastructure projects, what happens to the AD curve?
An increase in government spending directly increases a component of aggregate demand, causing the AD curve to shift to the right.
What causes a shift of the aggregate demand (AD) curve?
Any change in the components of aggregate demand (consumption, investment, government spending, or net exports) that is not due to a change in the price level will shift the AD curve.
Explain the interest rate effect.
The interest rate effect suggests that a lower price level reduces the demand for money, which lowers the interest rate and encourages more investment spending.
If businesses become pessimistic about the future economy and reduce their spending on new machinery, what happens to the AD curve?
A decrease in investment spending by firms reduces a component of aggregate demand, causing the AD curve to shift to the left.
What is the difference between a movement along the AD curve and a shift of the AD curve?
A change in the overall price level causes a movement along the AD curve, whereas a change in C, I, G, or NX for a reason other than the price level causes the entire curve to shift.