MAcro CHAPTER 3.1:

CHAPTER SUMMARY

In Micro, we looked at the demand curve (D), which showed that, as the price of a particular good rises, people will buy less of it. Now, we will expand that idea to our whole economy in the form of the aggregate demand curve (AD). Aggregate simply means "all added up." It is all of the demand for all different goods added up into one curve, and it looks like this:

On the Y-axis, we replace P, price, with P(L), price level. Price level is simply the average price of all different goods in an economy. If the price of all things goes up by 10%, then the price level has gone up by 10%. On the X-axis, we replace Q, quantity, with Real GDP. Otherwise, the Aggregate (AD) graph is exactly like the Demand (D) graph!

From this graph, we can see that, as the price level rises, the amount of stuff that people want to buy falls. The main two reasons this happens are:

• Real Balances Effect: When prices rise and incomes stay the same, people have less purchasing power, so they will demand less stuff.

• Foreign Trade Effect: When prices in this economy rise, people are more likely to import goods from other economies. If we import stuff from other countries, we are likely to stop making it in our country, reducing GDP.

A shift in AD is caused by any change in the GDP formula, GDP = C + I + G + Nx. An increase in consumer spending, investment spending, government spending, or net exports will cause AD to shift to the right, and a decrease in any of those things will cause it to shift to the left. These shifts look and work exactly the same as in Micro - the only change is in how the graph is labeled.

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