Macroeconomics

‭A. Aggregate Demand (AD)‬ ‭In‬ ‭economics,‬ ‭the‬ ‭term‬ ‭“aggregate”‬ ‭refers‬ ‭to‬ ‭total‬ ‭.‬ ‭While‬ ‭demand‬ ‭is‬ ‭a‬ ‭microeconomic‬ ‭concept,‬ ‭aggregate‬ ‭demand‬ ‭(AD)‬ ‭is‬ ‭a‬ ‭macroeconomic‬ ‭concept‬ ‭that‬ ‭describes‬ ‭the‬ ‭relationship‬ ‭between‬ ‭the‬ ‭general‬ ‭price‬ ‭level‬ ‭and‬ ‭the‬ ‭total‬ ‭spending‬ ‭or‬ ‭aggregate‬ ‭output‬ ‭demanded‬ ‭by‬ ‭households,‬ ‭frms,‬ ‭governments, and the foreign sector.‬ ‭In‬‭other‬‭words,‬‭aggregate‬‭demand‬‭is‬‭the‬ ‭total‬‭demand‬‭for‬‭an‬‭economy’s‬‭goods‬‭and‬‭services‬‭at‬‭a‬‭given‬ ‭price‬ ‭level‬ ‭in‬ ‭a‬ ‭given‬ ‭period‬ ‭of‬ ‭time‬ ‭.‬ ‭It‬ ‭is‬ ‭made‬ ‭up‬ ‭of‬ ‭four‬ ‭components:‬ ‭consumption,‬ ‭investment,‬ ‭government‬‭spending,‬‭and‬‭net‬‭exports.‬‭This‬‭should‬‭sound‬‭familiar‬‭since‬‭these‬‭are‬‭the‬‭same‬‭components‬ ‭used‬‭to‬‭calculate‬‭real‬‭GDP‬‭using‬‭the‬‭expenditure‬‭approach!‬‭(Recall‬‭Chapter‬‭2‬‭Section‬‭B:‬‭Components‬‭of‬ ‭Gross Domestic Product and Approaches to Measure it ). Therefore,‬ ‭AD = C + I + G + (X − M)‬ ‭.‬ ‭Aggregate Demand Curve (AD Curve)‬ ‭The‬ ‭aggregate‬ ‭demand‬ ‭curve‬ ‭(AD‬ ‭curve)‬ ‭illustrates‬ ‭the‬ ‭different‬ ‭quantities‬ ‭of‬ ‭total‬ ‭demand‬ ‭for‬ ‭an‬ ‭economy’s‬‭products‬‭at‬‭different‬‭price‬‭levels.‬‭The‬‭price‬‭level‬‭is‬‭plotted‬‭on‬‭the‬‭y-axis‬‭and‬‭the‬‭real‬‭GDP‬‭is‬ ‭plotted‬‭on‬‭the‬‭x-axis.‬‭Note‬‭that‬ ‭real‬‭GDP‬ ‭and‬ ‭real‬‭output‬ ‭can‬‭be‬‭used‬‭interchangeably‬‭as‬‭a‬‭label‬‭on‬‭the‬ ‭x-axis.‬

‭The‬‭AD‬‭curve‬‭is‬ ‭downward‬‭sloping‬ ‭indicating‬‭an‬ ‭inverse‬‭relationship‬ ‭between‬‭the‬‭price‬‭level‬‭and‬‭real‬ ‭output.‬

‭Study Tip‬ ‭All demand and supply curves can be drawn as straight lines or curves.‬

‭The inverse relationship between the price level and real GDP can be attributed to‬‭three main effects:‬

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