Aggregate Demand (AD)
| English | Chinese | Pinyin |
|---|---|---|
| aggregate demand | 总需求 | zǒng xū qiú |
| wealth effect | 财富效应 | cái fù xiào yìng |
| interest rate effect | 利率效应 | lì lǜ xiào yìng |
| exchange rate effect | 汇率效应 | huì lǜ xiào yìng |
| shift | 移动 | yí dòng |
| consumer confidence | 消费者信心 | xiāo fèi zhě xìn xīn |
What the whole economy wants to buy
- Unit 2 measured the economy with real GDP and the price level.
- Now we ask what sets those two numbers.
- The first half of the answer is the total demand of everyone at once.
- It is called aggregate demand 总需求 (AD).
Why AD slopes down
- Aggregate demand is the total real output all buyers want at each price level, and it slopes downward.
- But not for the usual reason — there is no "substitute" for everything. Three economy-wide effects explain it:
- The wealth effect 财富效应: a lower price level makes savings worth more, so people buy more.
- The interest rate effect 利率效应 and exchange rate effect 汇率效应: a lower price level cuts interest rates (lifting investment) and weakens the currency (lifting net exports).
The AD-AS model
Aggregate demand slopes down and shifts right when consumption, investment, government spending, or net exports rise.
The aggregate demand curve slopes downward mainly because of the wealth, interest rate, and:
AD covers every good, so there is no substitution — the three macro effects explain the slope.
The wealth effect says a lower price level:
With a lower price level, the money people already hold buys more, so they feel richer.
AD's four spending components
- AD is built from the same four parts as GDP: $AD = C + I + G + (X - M)$.
- $C$ consumption, $I$ investment, $G$ government spending, $(X - M)$ net exports.
- A movement along AD happens only when the price level changes.
- A shift 移动 happens when something else changes a component — a rise in any of them shifts AD right.
Aggregate demand equals C + I + G + (X − ______).
AD = C + I + G + net exports (X − M).
A rise in consumer confidence causes:
Higher confidence raises C at every price level, shifting the whole curve right.
A change in the price level causes a movement along AD, not a shift.
Only a change in a spending component shifts AD; the price level moves you along it.
What shifts AD
- Consumer confidence 消费者信心 or expected higher incomes raise $C$ → AD right.
- Lower interest rates raise $I$ → AD right.
- Worked idea. A wave of optimism lifts confidence, so households plan 100b more spending at every price level — AD shifts right by 100b (and further once the multiplier acts).
Select all that shift AD to the right.
Higher C, I, or G shift AD right; a price-level change is only a movement along it.
Aggregate demand slopes down via the wealth, interest rate, and exchange rate effects. It is $AD = C + I + G + (X - M)$. The price level moves you along AD; a change in any component shifts it — up shifts AD right, down shifts it left.