Shifting Aggregate Demand

So just like we shifted a market demand curve left or right, we can shift aggregate demand left or right. Let's see how we would shift an aggregate demand curve. So remember when we dealt with market demand, if the price changed, if the price level changed, excuse me if the price changed in the market well we would only move along curve right, we would move along that curve. We wouldn't draw a whole new curve. We wouldn't shift the curve if the price changed. So it's the same thing here with aggregate demand. If the price level changes. Well that's just a movement along the curve. But if something else affects our aggregate demand, well that would cause us to draw a whole new aggregate demand curve. So just like we've said, G. D. P. Is equal to C plus I plus G plus N. X. Right, consumption plus investment plus government purchase plus net exports. Well our aggregate demand is these this spending right? The consumption spending the investment spending. These are the things being demanded in the economy. So when we shifted market demand we use this idea of good or bad, right, good things happening for demand, bad things happening for demand. So if good things happen for demand we would shift it to the right. And if bad things happened we would shift left right. If it was something bad for demand. So that was something like this will do bad over here and good over here. Remember we would just draw a graph and we would have our demand curve that we started with. So this would be D. One and we'll say a. D. One aggregate demand one. And if it was something bad, well, we would shift to the left and draw a new curve, aggregate demand too. And if it was a good situation, something good happened for demand. Well, we would have our original aggregate demand a. d. one and then something good happens, shifting it to the right where we would have A. D. Two out here. Right, aggregate demand to let me get out of the way. Right. So that should look familiar except the only little differences how we're labeling these graphs now we've got our price level instead of just price. It's the price level in the whole economy and we've got G. D. P. The amount of GDP demanded. And here we've got price level. Same thing in GDP. Right. So this is how we're gonna be. Think of it. Thinking of it when we're shifting the aggregate demand curve and aggregate supply curve. Right? And guess what? Just like with with our market, demand and supply, we're gonna have an equilibrium in our aggregate demand and aggregate supply model. So let's start here with aggregate demand. And let's see what are some of the factors that can shift our aggregate demand left or right. So remember aggregate demand is made up of those consumption, investment, government purchases and net exports. So how could something change within consumption that could lead for a shift in the aggregate demand curve, investment, right. We're gonna see all of those different factors. And remember the price level can't be uh one of these factors because the price level is on our graph. So if the price level changes, we're just moving along the graph, right, we would just move from one point here on the curve to another point on the same curve from the price level changing. So let's start here with consumption and let's think about the different things that can affect it first is interest rates. So if interest rates go up, what's gonna happen, interest rates go up, people are gonna save more, right, savings are gonna go up. So when savings go up, well, consumption goes down, right? Because whatever income you make, you're either gonna use it now to consume or you're gonna save it for later. So if savings go up, consumption is gonna go down, which is gonna lead aggregate demand to go down, right? Because if consumption goes down, well, that's part of aggregate demand leading aggregate demand to go down about income taxes, income taxes go up while we have less income, less disposable income left over to spend on whatever we want, if we have less disposable income left, well, we're going to consume less, which is going to shift our aggregate demand down as well, right? So these are shifts left, right? When I say down is the same as left, it's like a bad thing happening for aggregate demand, it would be a shift left, and obviously the opposite. If interest rates go down, there's less savings, more consumption and more aggregate demand, lower income taxes, while we have more money available, consumption goes up. Right? So all of these go vice versa. We're only gonna talk about one way, because I think this I've chosen which way, I think it's easier to kind of think about this and then the other way is just the opposite. So how about the next one? Expected income is another thing that could affect our aggregate demand. If you think you're gonna make more money in the future? Well, you might spend a little more now, right? You think there's a bonus coming in something like that? Well, you would spend a little more now and your consumption would go up and aggregate demand would go up, right, expected income goes up. Well, that's a good thing for consumption. So let's move on to the next one here. Investment. So, factors that affect investment. Again, interest rates just like interest rates affected consumption. Well, they're gonna affect investment as well. However, it's for different reasons, right? Because interest rates, um the firms are asking for loans to make investments in buildings and equipment. Machineries factories. Right? So when they take out these loans, they want lower interest rates. So if these interest rates are going up, there's gonna be less investment, they don't want to invest that higher interest rates because that's gonna cost them more money. So higher interest rates is lower investment, which leads to lower aggregate demand about tax is very similar to consumption, right? Higher taxes. While there's less money available, we're paying more taxes, we have less to invest. So there's less aggregate demand as well. And how about the next one? Expected profit? What do you guys think about this one? A lot of these are very logical if expected profit goes up? Well, if we think we're gonna make more money, we're gonna want to invest in machinery and keep up with that demand to keep um making more money. Right? So if we're expecting more profit, we're gonna invest more, which is gonna lead to more aggregate demand as well. Now let's go to the next one, factors that affect government purchases. Now, we're not gonna get too deep into government purchases in this model. We tend to leave the discussions of government when we talk about monetary policy and fiscal policy, which we go into a lot of detail in later chapters. Right? So at this point, we we kind of just talk about government purchases and we just say, well, if there's more government purchases, well, then there's more aggregate demand. Right? And that's just because higher level of government purchases leads to higher aggregate demand. It's one of the components of aggregate demand. And then finally, net exports. So this one deals with foreigners here. And we got to think about the difference in the growth and the difference in exchange rates between the US and foreign countries. So relative growth rates. If USA has as a lot of growth, well that means we're making more money here, There's more income being made means there's gonna be more imports, right? Imports are going to increase. Because if we're spending more money um we're earning more money, we're spending more, we're gonna be importing more stuff from overseas. Well if imports goes up, that means net exports goes down right? Because the more imports we have remember that net exports is equal to exports minus imports. So if these imports are going up, well that's less net exports, right? So less net exports leading to less aggregate demand in that case. So when we have when we have GDP growth US consumers have more income which leads to more imports. Just like I said, they're kind of have it more clearly stated uh right there on the page and finally exchange rates. This also affects net exports. So if the value of U. S. Dollars goes up, we'll think about that, each U. S. Dollar has more buying power right? More buying power abroad to buy foreign products. So again imports are gonna be going up because our dollars are worth more in other countries. So net exports again goes down, leading to less aggregate demand, right? So we have to think of how um how these these differences between our country and another country's growth rate or the exchange rates is going to affect the level of imports and the level of exports. Alright, so these are things that can shift our curve. So in any of these cases we can have our original aggregate demand curve and say that that a question said, here's your aggregate demand curve and interest rates, um interest rates are going up in the economy. How how does this affect aggregate demand? Well, we know that higher interest rates leads to less consumption, leading to lower aggregate demand as well as lower investment as well. Just like we discussed here, also leading to less aggregate demand. So as investment as interest rates go up, we would shift our aggregate demand curve to the left, just like we're used to from when we study market supply and market demand. Cool. Alright. So that's how we would shift aggregate demand. Let's go ahead and move on.