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Understanding Downward Sloping Demand Factors

The document outlines the reasons for the downward sloping Aggregate Demand (AD) curve, including the real wealth effect, interest rate effect, and exchange rate effect. It also discusses factors that shift the Aggregate Supply (AS) curve, such as changes in resource prices, government actions, and productivity changes. Additionally, it highlights the implications of fiscal policy, including budget deficits and the potential cons like increased debt and operational lags.

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jill25lee
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16 views2 pages

Understanding Downward Sloping Demand Factors

The document outlines the reasons for the downward sloping Aggregate Demand (AD) curve, including the real wealth effect, interest rate effect, and exchange rate effect. It also discusses factors that shift the Aggregate Supply (AS) curve, such as changes in resource prices, government actions, and productivity changes. Additionally, it highlights the implications of fiscal policy, including budget deficits and the potential cons like increased debt and operational lags.

Uploaded by

jill25lee
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Sunday, November 16, 2025 10:52 PM

3 Reasons for it being downward sloping: Shifters of the AD curve

1) Real wealth effect - consumer behavior


a. PL falls, consumers assets can buy more
b. PL increases, consumers buy less
2) Interest rate effect - borrower/business/investor behavior
a. PL increases, consumers buy less + save less
i. Means less $$$ in banks + less money lent to
borrowers
ii. Results in higher IR + less investment spending, less Q
demand
3) Exchange rate effect - people in other countries behavior
a. PL increase in one country, other countries Q demand less

Gov spends --> goes to sum1s income --> that person saves some of that + spend the rest -->
That $$$ spent becomes sum1 else's income --> that person saves + spend the rest bla bla bla

Deposit money --> bank must hold portion in required reserves + loans rest out --> ppl who took out
loan spends that money --> money eventually goes into another bank --> bank must hold portion bla bla

UPWARD SLOPING REASON:


PL increase --> producers wanna
Make more --> Q increase

SHIFTERS:
1) change in resource price
○ Price increase --> shift left
2) Gov actions
○ Taxes, subsidies
3) Change in productivity
○ Change in tech -> more output
4) Neg supply shock
a. Unexpected decrease in key resource
i. Decrease in SRAS
5) Pos supply shock
a. Unexpected increase in key resource
i. Increase in SRAS
6) Change in EXPECTED price lvl
a. Expect inflation = cost of resource increase
i. Curve shift left
b. CREATES LONG RUN AGG SUPPLY CURVE!

U3 MACRO Page 1
Price level Price level
increase -> decrease ->
wages/resource lower workers
cost increase -> wages -> lower
increase the the cost to
cost to firms -> firms -> SRAS
SRAS shift left shift right

Decrease consumer spending


Increase consumer spending

Decreases overall spending


Substitutes consumer spending

Budget deficit = increase during expansions, decrease during contractions


Taxes - increase during expansions (more income to tax), decrease during contractions
Transfer payments - decrease during expansions, increase during contractions

CONS OF FISCAL POLICY - debt, crowding out (increase nominal IR -> less gross investment, operational
lags (long time to take action - procyclical which means counterintuative, worsens problem)

U3 MACRO Page 2

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