Aggregate Demand

-Aggregate Demand- shows the amount of Real GDP thats public, private and foreign sector collectively desire price level.

- The relationship between price level and the level of Real GDP is more inverse.

Downward Slope:

- Real GDP Balance effect:

  -When price level is high, households and businesses cannot afford to purchase as much output 

  -When the price level is low, households and businesses cannot afford to purchase more output

Interest Rate Effect:

 - higher price level increases the interest rate tends to discourage investments

 - lower price level decreases the interest rate tends to encourage investments

Foreign Purchase Effect:

 -higher price level increases the demand for relatively cheaper imports

 -lower price level increases the foreign demand for relatively cheaper U.S exports

Shifts A.D.

- C, Ig, G, Xn

- multiplier effect that produces a greater change in the 4 components

- increase in AD = AD ->

- decreases in AD = AD <-

Consumption:

-consumer wealth

*more wealth = more spending (<-)

* less wealth = less spending (->)

-consumer expectations

*positive expectations = more spending (->)

*negative expectations = less spending (<-)

-households indebtedness

*less debt = more spending (->)

*more debt = less spending (<-)

-taxes

*less taxes = more spending (->)

*more taxes = less spending (<-)

Determinants of SRAS 
-input prices
-productivity
-legal institutional environment

Domestic Resource Price 
-wages
-cost capital
-raw materials

Foreign
-strong $ = lower
-weak$ = higher 

Market Power
-monopolies and cartels that controls resources control money
*increase in resource prices = SRAS <-
*decrease in resource $ = SRAS ->
-Productivity = Total output
                         Total input
-more productivity = lower unit productivity cost = SRAS ->
-less productivity = higher unit productivity cost = SRAS <-

Taxes and Subsidies
-taxes ($ to government) on business increase per unit production cost = SRAS <-
-subsidies ($ to government) to business reduce per unit production cost = SRAS ->

Government Regulation
-gov't regulation creates a cost of compliance = SRAS <-
-deregulation reduces compliance cost = SRAS ->