Aggregate Demand Curve : A schedule that shows amounts of real output (real GDP) that buyers collectively desire to purchase at each possible price level. (Thus, price level and real domestic output are inversely related.)
Rationale of downward slope of AD curve:

• Real-balances effect (i.e. Wealth Effect): A change in the price level
  • A higher price level reduces the real value (purchasing power) of the public's accumulated savings balances. In other words, the real value of assets with fixed money values (eg. savings accounts, bonds) diminishes. Keep in mind that wealth also includes physical assets such as houses and cars; as such, a fall in the value of housing will diminish the wealth of homeowners.
  • Simply put, a lower price level makes you seem wealthier while a higher price level makes you seem less wealthy.
  • The public is then more poor in real terms and will reduce spending.
    • Higher prices mean less consumption.
• Interest-rate effect: A change in the interest-rate level
  • Assume that the supply of money in an economy is fixed.
    • low price levels will cause interest rates to decrease and result in more consumer spending
    • If the price level rises, consumers and businesses need more money to consume or invest. Therefore, a higher price level increases demand for money
    • An increase in money demand will drive up the price paid for its use - this is interest.
      • Higher interest rates then reduces investment or consumption which require loans.

Foreign purchases effect (i.e. Net Export Effect):

• When domestic price levels rise relatively to foreign products, foreigners buy fewer U.S. goods, and Americans buy more foreign goods. Thus, U.S. exports fall and U.S. imports rise
  • The rise in the price level of U.S. goods reduces the quantity of U.S. goods demanded as net exports.
  
  Difference between AD curve and microeconomics demand curve:
• No substitute effect, because you cannot substitute all goods.
• No income effect, because a lower price level actually means less nominal income for the resource suppliers -- e.g. lower wages, rents, interests, profits.
  

*We study aggregate demand to see how fluctuations in C, I, G, and Xn affect the AD curve*

Determinants of Aggregate Demand / AD shifters
Note: change in determinant that directly changes amount of real GDP

• multiplier effect produces greater change in AD than initiating change in spending
• shift along the curve = changes in real GDP

• Consumer spending: (C)
  • Consumer Wealth: Consumer wealth includes both financial assets and physical assets. A sharp increase in the real value of consumer wealth prompts people to save less and buy more products, shifting the AD curve to the right. Also vise versa.
  • Expectations:
    • Expectation of future income rises, ppl tend to spend more of their current incomes. Thus current consumption spending increases, and the AD curve shifts to the right. Also, a widely helped expectation of surging inflation in the near future may increase aggregate demand today because consumers will want to buy products before their price escalate.
  • Household debt: Increased household debt enables consumers collectively to increase their consumption spending, which shifts the AD curve to the right.
  • Taxes: A reduction in personal income tax rates raises take-home income and increases consumer purchases. Tax cuts shift the AD curve to the right.
    
• Investment spending: (unstable) (I)
  • Real Interest Rates:
    • An increase in real interest-rate will decrease investments aka shift aggregate demand curve to the left. It identifies a change in the real interest rate resulting from a change in the nation's money supply.
    • An increase in the money supply lowers the interest rate, thereby increasing investment and aggregate demand and vice versa.
  • Expected Returns:
    
    • Expected future business condition: If firms think that the future is looking good, they will probably invest more today to help boost up their profits. However, if they think the future is looking bleak, they will cut back on investment, thus shifting AD to the left.
    • Technology: New and better technology helps to shift AD to the right because they usually have a high expected rate of return.
      • For example, recent advances in microbiology have motivated pharmaceutical companies to establish new labs and production facilities because there is a greater demand for those capital goods.
    • Degree of excess capacity: When there's more excess capacity (unused capital), there will be less investment, meaning an inward shift of the AD curve. But once they realize that they have used up their capital, the expected returns on new investment rise, they will start investing more, meaning an outward shift of the AD curve.
    • Business taxes: An increase in business taxes will cut out more of the after-tax profits so investment and AD will decrease and shift left. Conversely, a decrease in taxes will shift the curve out.
• Government spending: (G)
  • When the government spends more, the AD curve shifts to the right, as long as the interest rates and tax collections do not change
  • A decrease of government spending, such as fewer projects in transportation, will shift the AD curve to the left.
    
• Net export spending: (Xn)
  • A rise in net exports (higher exports relative to imports) shift the aggregate demand curve to the right.
  • • National income abroad: Rising national income abroad encourages foreigners to buy more products. Net exports of the U.S. thus rise and aggregate demand curve shift to the right.
    • Exchange rates: change in the dollar's exchange rate. The price of foreign currencies in terms of the U.S. dollar-- may affect U.S. exports and therefore aggregate demand. If the U.S. dollar depreciates in terms of the euro, the new higher value euros enables consumers to obtain more dollars with each euro--> exports rise, imports fall --> AD shifts out.