Aggregate Demand- Shifts and the Downward Slope Flashcards
(15 cards)
What is Aggregate Demand (AD)?
The total demand for a country’s goods and services at different price levels in a given time period.
What is the equation for Aggregate Demand?
AD = C + I + G + (X − M)
C: Consumer spending
I: Investment
G: Government spending
X: Exports
M: Imports
Why does the AD curve slope downward?
Because as the price level falls, total spending (real GDP) rises due to:
Wealth effect – Lower prices increase real income → more spending
Interest rate effect – Lower prices = lower interest rates → more borrowing/investment
Trade effect – Lower domestic prices = more exports, fewer imports → AD rises
What are extension and contraction along the AD curve?
Extension: Movement down the curve (price falls, AD rises)
Contraction: Movement up the curve (price rises, AD falls)
What causes a shift in the AD curve?
Any non-price factor affecting C, I, G, X, or M such as:
Confidence
Interest rates
Taxation
Government policies
Exchange rates
Global conditions
What’s the difference between a movement along the AD curve and a shift of the AD curve?
Movement = caused by change in price level
Shift = caused by change in any component of AD (C, I, G, X, M) unrelated to price
What is the Wealth Effect (on AD)?
When the price level falls, the real value of money increases, making people feel wealthier. This boosts consumption (C), increasing AD.
What is the Trade Effect (on AD)?
A lower price level makes domestic goods more competitive abroad (exports ↑), and imports less attractive (imports ↓), so net exports (X − M) increase, raising AD.
What is the Interest Rate Effect (on AD)?
Lower price levels lead to lower interest rates (to control inflation), which boosts consumption (C), investment (I), and net exports (X − M), all increasing AD.
What happens to AD when the price level increases?
The opposite:
Real wealth falls → C drops
Exports less competitive, imports more attractive → (X − M) drops
Interest rates may rise → C, I, and (X − M) fall
Result: Contraction along the AD curve
What happens to AD when the price level decreases?
Wealth increases → C rises
Exports rise, imports fall → (X − M) rises
Interest rates fall → C, I, and (X − M) rise
Result: Extension along the AD curve
What causes the Aggregate Demand (AD) curve to shift?
AD shifts when there is a change in consumption (C), investment (I), government spending (G), or net exports (X-M), not due to a change in the price level.
Does a change in the price level shift the AD curve?
No. A change in the price level causes movement along the AD curve, not a shift.
What does a rightward shift of the AD curve indicate?
It indicates an increase in aggregate demand at every price level — for example, due to higher consumption, investment, government spending, or net exports.
What does a leftward shift of the AD curve indicate?
It indicates a decrease in aggregate demand at every price level — for example, due to lower consumption, investment, government spending, or net exports.
