>> We are going to talk
about aggregate demand,

why it slopes the way it
does, and what could shift it.

The best way to get confused in
economics is to forget what is

on the axis of your graph.

For aggregate demand
and aggregate supply,

the whole economy's output,
GDP, is on the horizontal axis,

and the whole economy's price
level is on the vertical axis.

Aggregate demand is a downward
sloping line in this space.

When the price level
is high, demand is low,

and when the price level
is low, demand is high.

So why does aggregate
demand slope downwards?

A couple reasons.

First, the wealth effect.

At any given time, people
have a certain amount

of money in the bank.

When prices go down,
the purchasing power

of that money increases
and people buy more.

When prices go up, the
purchasing power of that money

in the bank decreases
and people buy less.

Second, the interest
rate effect.

When prices go down,
people don't need to have

as much cash laying around
to cover their purchases.

They can afford to save
some of that money.

The increase in savings
lowers interest rates,

and that boosts business
investment and loans

for buying homes or cars.

All of this increases output.

Third, the exchange rate effect.

When the price falls,
savings increases

and the interest rate falls.

That causes some savers

to invest their savings
in foreign countries.

This lowers the value
of the dollar,

leading to more exports
and more demand.

So, now we know why aggregate
demand slopes downwards.

There is an inverse relationship

between the national price
level and output demanded.

But what could make
aggregate demand shift?

First, if consumers decide
to save more and spend less

for reasons unrelated
to price --

maybe they are concerned

that their future
incomes will fall --

aggregate demand
will shift left.

Likewise, if consumers are more
confident about the future,

they will spend more
and save less,

shifting aggregate
demand to the right.

In 2008, as the financial
crisis unfolded,

consumers became very worried
that they would lose their jobs

or that their retirement
savings would disappear

as the stock market fell.

They cut their spending
and boosted their savings,

shifting aggregate
demand inwards.

Second, if businesses
spontaneously decide to invest

in more capital goods -- perhaps

because new capital
is more productive --

that would shift aggregate
demand to the right.

A decrease in business
investment would shift aggregate

demand to the left.

In the 1990s, we saw
an example of a shift

out for aggregate demand
as businesses rushed

to purchase increasingly
cheap and powerful computers.

As a result, the economy boomed.

Third, an increase in
government purchases or a cut

in taxes would shift
aggregate demand to the right;

while a cut in government
purchases

or a tax increase would shift
aggregate demand to the left.

We saw a dramatic
version of this

when the United States
entered World War II.

A huge increase in
government purchases

of military equipment caused
a surge of aggregate demand,

finally boosting
the United States

out of the Great Depression.

Keep in mind, a change

in the price level will
not shift aggregate demand.

It will only give
us a move-along.