which of the following is a correct explanation for why the aggregate demand curve slopes downward? This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you Y1/IB 18) Aggregate Demand – Shifts and the Downward Slope. Following along are instructions in the video below:
“Everybody. Aggregate demand is the total demand for a country s goods and services at at a given price level in a given time period. That s a definition you to know more so. We use the equation.
Don t need for aggregate demand. Remember. Aggregate demand is a measure of total expenditure on a country s goods and services expenditure. So we are measuring the total spending taking place in an economy consumers spending see investment spending by firms.
That is the spending by firms on capital goods. Government spending and net export spending. Where x. Is the value of exports are you export revenues and m.
Is the value of imports. I import expenditure always remember it s a measure of spending it s aggregate demand okay not quantities spend it okay when we draw an aggregate demand curve we draw it downward sloping like this where aggregate demand is c. Plus. I plus g.
Plus x. Minus f. Remember to label. The axis right.
What we have price level and real gdp and on the y axis. We use p is on the x axis. We use y s to represent me or gdp..
Why does the aggregate demand curve sloped downwards why when there is a fall in the price level is there an increase in aggregate demand or an extension of ad in there for an increase in real gdp. Why when the price level increases does aggregate demand reduce. There is a contraction of ad and therefore for in real gdp. Why does that take place well there are three reasons.
Why we re going to look at all three in a second remember that the downward slope makes reference to the fact that there is an inverse relationship between the price level and real gdp. There is an inverse relationship between the price level and the level of aggregate demand all right so these three effects link to purely how changes in the price level can affect one or more of these variables. Aggregate. Demand can only ever change.
If cidr x. Minus an increase or decrease. But if the applicate demand curve is downward sloping it means aggregate demand is changing purely for reasons to do with the price level changing. What is the wealth effect.
Say the wealth effect. Says that as the price level decreases. Let s say from p1 to p2 the purchasing power of income now increases in real terms people are richer therefore they re more likely to spend money on goods and service in goods and services in the economy. Which will increase c so consumption increases.
But purely because the price level has changed therefore there ll be an extension or expansion of aggregate demand in the economy in real gdp will increase for that reason that s the wealth effect. The purchasing power of income increasing or decreasing when the price level changes and then affecting consumption. The trade effect. When i stick of fall in the price level again.
The trade effect states that is the price level decreases for example exports. Become more competitive and imports become less competitive. If exports become more competitive..
They ll be a greater demand for exports and the revenues generated from exports will increase increasing x in this equation. At the same time imports become less competitive because domestic goods and services are more competitive. So they ll be less spending on imports. Which will reduce the value then in the bracket.
So as a result purely of a change in the price level. The value of x minus m. Will increase aggregate demand will increase therefore real gdp will increase. We move along the curve vice versa.
If the price level increases. That s the trade effect. What about the interest effect. Well the interest effect.
States. And it s a price level decreases. For example interest rates can be kept lower in the economy. Because most central banks will adopt interest rate policy to meet an inflation target.
So inflation is low let s set. P2. Then interest rates can be kept lower in the economy and lower interest rates. Stimulate higher consumption stimulates higher investment.
Okay because the cost of borrowing is lower. And it also reduces the value of the exchange rate. Which can then boost your net export performance in x minus m..
Okay. So the interest effect links. Purely as a result of a change in the price level. Which can then affect.
Ci x. Minus m. As interest rates are lower or higher in the akan depending on what the change in the price level is so crucially all three effects explain why any of these variables in the ad equation will increase or decrease. But because only of changes in the price level as a result we see either extensions of aggregate demand when the price level decreases or contractions of aggregate demand when the price level increases thus increasing or decreasing or gdp in the economy.
That is so important to take away guys. So. Many students are very naive with why the aggregate demand curve slopes downwards. Not anymore you can plug back up.
So. When does the aggregate demand. Curve shift well clearly the aggregate demand. Curve will shift.
When there is an increase or decrease. In ci g. And or x minus m. But nothing to do with the price level changing independent of the price level.
So consumption increases or decreases for reasons not to do with changes in the price level. Same. With i same with g s same with x minus m..
Nothing to do with changes in the price level. So one price level aggregate demand can shift right or left. There are other reasons. Why c.
I g. And. X. Minus m.
Are changing independent of the price level. That s when we shift the aggregate demand curve and at the same price level. You can see we can have higher or lower levels of aggregate demand and therefore higher or lower levels of real gdp. And we re going to cover all those reasons in the next.
Few videos. So make sure you stay tuned and watch all those videos where i cover. What fact is independent on the price level can effect c. I g.
And x minus m. Thank you so much watching guys i ll see you all in those next videos. ” ..
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