https://www.desmos.com/calculator/lx01phxp84

Terms to Know

• Price level - Some measure that captures all the prices in an economy
  • For example, the CPI or the GDP deflator
• Real wealth effect - When a change in the price level leads to a change in consumer spending
• Interest rate effect - When a change in the price level leads to a change in interest rates and interest-sensitive spending; when the price level drops, you keep less money in your pocket and more in the bank. That drives down interest rates and leads to more investment spending and more interest-sensitive consumption
• Exchange rate effect - When a change in the price level in one country leads to other countries purchasing more of that country’s goods
• Fiscal policy - The use of taxes, government spending, or government transfers to affect real GDP
• Monetary policy - The use of the money supply to impact interest rates, which in turn affects real GDP
• Long-run - A period where all factors of production and costs are variable
• Short-run - A period in which the price of at least one factor of production cannot change
  • For example, if wages are stuck at a certain level, we would still be in the short run
• Misperception theory - When a seller sees the price of its products decline and makes an erroneous assumption that their relative prices have also declined
• Sticky prices/wages (nominal price rigidity) - The idea that some prices and wages are not fully flexible and cannot completely respond to changes such as inflation or deflation
• Menu-cost theory - The idea that firms might not change their prices when there is a change in the price level because it is costly to do so

Aggregate Demand

Aggregate demand is the total demand for goods and services in an economy. Recall that GDP is the total amount of goods and services produced in an economy.

AD is the sum of four components: consumer goods, capital goods, net exports, and government spending programs

Why AD slopes down

The AD slopes down because of the wealth effect, interest effect, and the exchange rate effect.