Relationship+Between+AE+and+Aggregate+Demand

Aggregate expenditures= autonomous spending (spending that doesn’t depend on income) + induced spending (spending that fully depends on the level of income) Aggregate Expenditure : “Aggregate expenditures equals the amount that households, firms, governments, and the rest of the world plan to spend on [Canadian output] at each level of real GDP Consumption, C Planned investment, I Government purchases, G Net exports, X – M, Consumption, [Import Spending, or National Income are some of the components that vary]with the level of real GDP.” ( [|www.swlearning.com/economic] s/mceachern/.../ppt.../ch25.ppt) Equilibrium in an economy occurs when the aggregate expenditure equals income “Aggregate demand is the total quantity of goods and services that people will buy at various price levels.” (John Sayre and Alan Morris, Principles for Microeconomics, McGraw-Hill Ryerson, 2009, p170). ** Aggregate Demand Curve  ** · “Thus far we have used the aggregate expenditure line to determine real GDP demanded for a given price level.” ( [|www.swlearning.com/economic] s/mceachern/.../ppt.../ch25.ppt) · “What happens to the aggregate expenditure line if the price level changes .” ( __www.swlearn ing.com/economic__  s/mceachern/.../ppt.../ch25.ppt) · “As will be seen, for each price level there is a specific aggregate expenditure line which yields a unique real GDP demanded  by altering the price level, we can derive the aggregate demand curve.” ( [|www.swlearning.com/economic] s/mceachern/.../ppt.../ch25.ppt) ** Downward Sloping  ** · Real Balances Effect- “Lower real wealth will cause people to cut down on spending. So, a higher price level leads to lower real wealth, lower consumption, and lower aggregate expenditures and therefore will produce a lower level of real level of GDP.” (John Sayre and Alan Morris, Principles for Microeconomics, McGraw-Hill Ryerson, 2009, p170).  · Keynes's interest-rate effect- A good or service with a high price level means that it takes more money to purchase the good/service because “ quantity of money demanded is dependent upon the price level .” ( [|http://www.sparknotes.com/economics/macro/aggr egatedem and/sect i on 2.rhtml] ). When there is a high price level people demand more money and when there is a little price level the demand is less because goods/services cost less. When more money is kept in the bank due to people spending less loans are easier to get from a bank as more loans from the bank are taken the interest rate decreases. “A low interest rate increases the demand for investment as the cost of investment falls with the interest rate. Thus, a drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand.” ( [|http://www.sparknotes.com/e conomics/macro/aggregatedemand/sectio n2.rhtml] ).  · Mundell-Fleming's exchange-rate effect- There is a correlation between the interest rate and price as the price falls in most cases so does the interest rate. When the return on investment in foreign countries is high there is more investment from other investors as a result there is a decrease in the real exchange rate. Goods and services are then cheaper and the next exports increase. “ Thus, as the price level drops, interest rates fall, domestic investment in foreign countries increases, the real exchange rate depreciates, net exports increases, and aggregate demand increases.” ( [|http://www.sparknotes.com/e conomics/macro/aggregatedemand/sectio n2.rhtml] ). ** Aggregate Demand and Expenditures  ** · “The aggregate expenditure line and the aggregate demand curve portray real output from different perspectives.” ( [|www.swlearning.com/economic] s/mceachern/.../ppt.../ch25.ppt) · “The aggregate expenditure line shows, for a given price level, how planned spending relates to the level of real GDP in the economy.” ( [|www.swlearning.com/economic] s/mceachern /.../p pt.../ch25.ppt) · “The aggregate demand curve shows, for various price levels, the quantities of real GDP demanded.” ( [|www.swlearning.com/economic] s/mceachern/.../ppt.../ch25.ppt)
 * Relationship Between AE and Aggregate Demand**