In the last video, we started thinking a little bit
about the aggregate demand curve
and why it might be downward sloping
and we actually reviewed some of the possible
justifications for a downwards sloping
aggregate demand curve, the wealth affect.
Remember, all other things equal.
We're not talking about changing the amount of money
in people's pockets or changing their outlook
or changing their jobs or changing
the level of investment, we're just saying
if prices were to just go down,
all of a sudden people would have ... They'd feel richer
because they could buy more with what they have
and so they might ... They might want to buy more,
demand more and so those things
would have to be produced and so real GDP would go up.
Real GDP would go up and that was the Wealth Affect
and likewise if prices went up,
the opposite would happen.
People would have less money or
they would have the same amount of money
in their pockets, but they could buy less with it
and so they would demand less
and real GDP would go ... real GDP,
real GDP would go down.
The other factor or justification I should really say,
because these are really just theories so you should
view them with huge grains of salt,
is that if prices ... If the general level of prices
were to go down, then interest rates would go down
and if interest rates would go down,
there would be more investments.
So prices go down, more investment. GDP goes up.
Prices go up. Interest rates would go up.
Real GDP would shrink and we would go over here
and then the last one dealt with exports
and that if general price levels went down,
both interest rates would go down
and just things would be cheaper in that country
and so we might have more net exports.
So once again, prices go down. GDP expands.
Prices go up. GDP ... GDP contracts.
All of these are possible theories or justification
for a downward sloping aggregate demand curve.
What I want to do in this video is think about
what, all other things equal,
what might cause the aggregate demand curve to shift
and how would it cause the
aggregate command curve to shift?
And to think about that,
to think about what the possible causes could be,
we just have to think about well, what are all of the things
that make up GDP?
And you might remember GDP and we use Y
as the variable for GDP.
It's equal to ... It's equal to consumption plus investment
plus government spending plus net exports
and this is a pretty good way to think about
what are all the things that might shift
the aggregate demand curve.
First of all you could think about consumption,
if there was some factor that would cause
consumption to increase.
So maybe you have a ... something like a tax cut.
You have a tax cut and you don't have a
corresponding government spending cut,
so essentially the government would have to.
If the government is already spending all the money it has,
it would probably have to go in to debt to allow
this tax cut to happen, but if you had this tax cut
all of a sudden people would have more money
in their pockets and they might be able to demand more.
That would cause ... that would cause
consumption to go up and it would make ... it would make
aggregate ... aggregate productivity or
aggregate demand go up.
So if you have a tax cut, something like that for consumers,
that might shift aggregate demand to the right
at any given level of prices,
people are going to demand more.
Likewise, if you had a tax increase and that tax increase
wasn't ... also didn't have more government spending,
then aggregate demand would go the other way.
So tax cut, it would shift to the right for people.
If there was a tax increase, all other things equal,
it would probably shift to the left, if you believe this model.
Likewise, investment.
Maybe government ... Maybe the government
allows all of a sudden companies to write-off
investments that they make this year or there are some
tax benefit from making investments in this year
and so you could have situations where for whatever reason
investment ... investment were to go up or it could just be
a natural ... There might be a newly discovered industry
where all of a sudden or resources that people start
investing in to find that thing and once again that would
cause aggregate GDP to go up, more investment.
And then the third piece of this,
we have the direct government.
We have the government right over here.
So if the government says,
"Hey, maybe ... Maybe we're going to incur",
assuming they're already spending as much money
as they have or maybe more than they have,
"We're going to incur even more ... even more
"debt to ... to spend more money."
So if government spending were to go up,
If government spending were to go up,
that would also shift the demand curve to the right
and all other things equal, if government spending were
to go down that might shift demand curve to the left
and the last one and this might be
a little bit common sense to you.
If for whatever reason, maybe our country all of a sudden
produces some goods and services that the rest of the world
really, really, really values. They can't produce it themselves
and that net exports were to go up,
if net exports were to go up, that means more people
in other countries are buying our goods and services,
then that, too, would cause aggregate demand to go up
or on the other hand, if all of a sudden people in our country
started saying, "Hey, we don't want to buy the stuff that we"
"produce. We want to buy what the people on the other"
"side of the ocean are producing."
That would make aggregate demand go down.
So to really think about how aggregate demand shifts,
you just have to really think about the components of GDP
and how different macro ... macro things might impact
those components of GDP and those will tell you whether
at a ... at a given level of prices of goods and services
in the economy whether it'll shift demand to the right
or to the left.