AD (Continued)

Determinants of AD

1.       Consumption:

·         Household spending affected by:

a.       consumer wealth:

                                                             i.      more wealth = more spending (AD shifts right)

                                                             ii.      Less wealth= less spending (AD shifts left)

b.      Consumer expectations:

                                                            i.      Positive expectations = more spending 

                                                            ii.      Negative expectations = less spending 

3. Household indebtedness:

                                                             i.      Less debt= more spending 

                                                             ii.      More debt= less spending 

4. Taxes:

                                                             i.      Less taxes= more spending

                                                             ii.      More taxes= less spending

2.       GDP

·         Investment spending sensitive to:

a.       the real interest rate:

                                                             i.      Lower real interest rate= more investment (AD shifts right)

                                                             ii.      Higher = less important (AD shifts left)

b.      Expected returns:

                                                             i.      Higher expected returns = more investment (AD shifts right)

                                                             ii.      Lower expected returns= less investment (AD shifts left)

•Expected returns are influenced by:

•Expectations of future profitability

•Technology

•Degree of excess capacity

•Business Taxes

3.       Government spending

                                                             i.      More government spending (AD shifts right) 

                                                             ii.      Less government spending (AD shifts left)

4.       Net exports 

a.       exchange rates (international value of ):

                                                            i.      Strong $= more imports, fewer exports (AD SHIFTS LEFT)

                                                            ii.      Weak $ = fewer imports, more exports (AD shifts right)

b.      Relative income:

                                                            i.      Strong foreign economy = more exports (AD shifts right) 

                                                            ii.      weak foreign economy = less exports  (AD shifts left)