Aggregate Demand Curve

Aggregate Demand (AD): the demand by consumers, business, government, and foreign countries.
- Changes in price level cause a move along the curve.

1. Real Balance Effect:
- Higher price levels reduce the purchasing power of money
- Decreases the quantity or expenditure
- Lower prices increase purchasing power of money.

2. Interest Rate Effect:
- When price level increase, lenders need to charge higher interest rates to get a real return on their    loans.
- Higher interest rates discourage consumer spending and business investment.


3. Foreign Trade Effect:
- When US price levels rise, foreign buyers purchase fewer US goods and Americans buy more foreign goods.
- Exports fall and import rise causing GDP it decrease.