5 Steps to a 5 AP Macroeconomics 2019

108 ❯ Step 4. Review the Knowledge You Need to Score High

consumption of domestic output (real GDP) falls along the AD curve. This is seen as a move­

ment from points a to b in Figure 9.1.

AD

Real GDP

Price

Level

a

b

Figure 9.1

Figure 9.2

•    Aggregate  demand  is   not    the vertical    or   horizontal summation   of   the    demand  curves  for 

all microeconomic goods and services.

•    AD is   a   model  of   how    domestic    purchasing  changes when    the aggregate   price   level

changes.

Changes in AD

Since AD is the sum of the four components of domestic spending [C, I, G, (X - M)], if

any of these components increases, holding the price level constant, AD increases, which

increases real GDP. This is seen as a shift to the right of AD. If any of these components

decreases, holding the price level constant, AD decreases, which decreases real GDP. This

is seen as a shift to the left of AD. Figure 9.2 illustrates these shifts in AD.

AD1

Real GDP

Price

Level

AD2

AD3

Increased AD

Decreased AD

This is a preview for policy to manipulate the macroeconomy. If you want to stimulate

real GDP and lower unemployment, you need to boost any or all of the components of

AD. If you feel AD must slow down, you need to rein in the components of AD. Policies

are tackled in more depth in the next chapter, but for now we’ll take a quick look at some

variables that can increase C, I, G, or (X - M).