Aggregate demand - shofts and the downward slope

• Aggregate demand - The total demand for a country's goods & services at a given price level in a given time
• Aggregate demand is a measure of total expenditure on a country's goods & services
• AD = C + I + G + (X-M)
• why does the AD curve slope downwards?

  because there is an inverse relationship between the price level and real GDP
• wealth effect - As the price level decreases from p1 to p2 the purchasing power of income now increases. People are richer. people are more likely to spend on goods & services - real GDP will increase

  CONSUMPTION increases

  
• Trade effect - Let's take a fall in Price level. As the price level decreases, exports become more competitive, and imports become less competitive. Demand for exports increases. Revenue increases.

  
• Interest effect - As the price level decreases. interest rates are kept low(inflation is low)-p2. There will be higher consumption, which stimulates higher investment(as cost of borrowing is lower)

  
• Interest Effect


  A change in the price level that affects the economy by influencing borrowing costs, consumption, and investment.