Aggregate Demand- Macro Topic 3.1 - Hey, how you doing, econ students? This is Mr. Clifford. Welcome to ACDC Econ. Today we're going to look at aggregate demand. [MUSIC PLAYING] The word aggregate means added all together. And so the aggregate demand is the demand for everything added all together. So we're not just looking at the demand for a specific product-- we're looking at the demand for everything. So cars, boats, trains, toothbrushes, absolutely everything is inside aggregate demand. We've already learned the four components of GDP-- consumer spending, investment spending, or business spending, government spending, and net exports, exports minus imports. And that's the components of aggregate demand. Let me explain. The camera I'm using can be purchased by only four different entities. It can either be purchased by consumers, it can be purchased by a business, it can be purchased by the government, or it can be purchased by another country. So the spending by these groups added all together is aggregate demand. Now, let's take a look at the graph. As you can see, the aggregate demand is downward-sloping. On the top right here, the y-axis, we have price level. And down here we have real GDP. At a high price level, the quantity demanded is very low. At a low price level, the quantity demanded is very high. There's two reasons for this. One is called the wealth effect, and the other is called the interest rate effect. The wealth effect says that when the price level goes up and there's inflation, the value of people's assets decrease. And so they buy less stuff. When price level goes down, their money goes further, and they have more purchasing power. And so they'll go buy more stuff. The interest rate effect is the idea that if the price level goes up, there are going to be higher interest rates. And with higher interest rates, consumption and investment will decrease. Now, the reason why interest rates go up when price level goes up is because people need more money to buy things. So they're to go borrow more, or they going to go liquidize more of their assets. And so they need more cash. This leaves less money out to loan out to other people, and so interest rates go up. When price level goes down, interest rates will fall, and so people will go buy more. The point is the aggregate demand curve is downward-sloping. Like a market demand curve, the aggregate demand curve will also shift. It increases to the right, and a decrease is to the left. Since aggregate demand is made up of the four components of GDP-- C, I, G, and Xn-- anything that causes those to change will shift aggregate demand. So let's practice. I've given you four examples that could shift the aggregate demand. Your job to figure out will the aggregate demand increase or decrease. Stop the video, and for each one, decide if aggregate demand goes up or goes down. An increase in the stock market will increase people's wealth, which means they have more money, so will increase consumer spending. That will increase, or shift, aggregate demand to the right. A decrease in government spending would definitely decrease the aggregate demand. Now, keep in mind, this is government spending on goods and services. This is not spending on things like social security or other stuff that is not counted as part of GDP. So this would have to be something like a decrease in defense spending. That would cause aggregate demand to decrease or shift to the left. If individuals fear a recession, they're going to buy less stuff and consumer spending will fall. And also, business spending or investment would also fall, and so aggregate demand would shift to the left. And increasing the incomes of our closest trading partners means those people would buy more of our stuff, so our exports would increase. And so our aggregate demand would shift to the right. Now, make sure to watch the next video, which will explain the short-run and long-run aggregate supplies. And then you can put them both together. Till next time.