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Macroeconomics · Unit 3 · 3.1
AP Macroeconomics · National Income and Price Determination
Aggregate Demand
AD slopes down through the wealth, interest-rate, and exchange-rate effects — and shifts whenever C, I, G, or net exports change.
key idea$AD = C + I + G + (X - M)$
What moves the curve
AD is total planned spending: C + I + G + Xn. A change in the price level moves along AD; a change in any spending component shifts it, amplified by the multiplier.
AD slopes down because a lower price level raises real wealth, lowers interest rates, and makes exports cheaper. A determinant change shifts AD right or left at every price level.Working the shift
Wealth effectlower PL raises real wealth → more C
Interest-rate effectlower PL lowers rates → more I
Exchange-rate effectlower PL → cheaper exports → more Xn
Multipliera spending change amplifies into AD
| Component | Rises when... | AD shifts |
|---|
| C | confidence or wealth up, taxes down | right |
| I | interest rates down, optimism up | right |
| G | government spends more | right |
| Xn | weaker currency, foreign income up | right |
Any rise in C, I, G, or Xn shifts AD right; a fall shifts it left. The move is magnified by the spending multiplier.
Worked analysis
EX 1
Move along vs. shift AD
classificationThe overall price level falls. What happens on the AD graph?
1
Identify the cause
The price level itself changed.
2
Apply the rule
That is a movement along AD.
3
State it
Real GDP demanded rises; AD does not shift.
EX 2
Shift AD
concept applicationConsumer confidence jumps across the economy. What happens to AD?
1
Find the component
Higher confidence raises C.
3
Add the multiplier
The final shift is larger than the initial spending rise.
EX 3
Trace net exports
reasoningThe domestic currency weakens. What happens to AD?
1
Effect on trade
Exports get cheaper, imports pricier.
2
Component
Net exports (Xn) rise.
Watch out
AD slopes down for macro reasons
Not the micro substitution effect — use the wealth, interest-rate, and exchange-rate effects.
Price level moves along AD
A change in the price level is a movement along AD; a change in a spending component shifts it.
The multiplier magnifies shifts
An initial change in spending shifts AD by a multiple of itself.
Check yourself
Why does AD slope downward?
Show answer
The wealth, interest-rate, and exchange-rate effects.
What are the components of AD?
Show answer
C + I + G + (X − M).
Higher consumer confidence shifts AD which way?
Show answer
To the right.
What magnifies an AD shift?
Show answer
The spending multiplier.