So just like we shifted a market demand curve left or right, we can shift aggregate demand left or right. Let's see how we would shift an aggregate demand curve. So remember when we dealt with market demand, if the price changed, if the price level changed, well, we would only move along the curve, right? We would move along that curve. We wouldn't draw a whole new curve. We wouldn't shift the curve if the price changed. So it’s the same here with aggregate demand. If the price level changes, well, that's just a movement along the curve. But if something else affects our aggregate demand, well, that would cause us to draw a whole new aggregate demand curve. So just like we've said, GDP is equal to C+I+G+NX, right? Consumption plus investment plus government purchases plus net exports. Well, our aggregate demand is these spending, right? The consumption spending, the investment spending, these are the things being demanded in the economy.
So when we shift in market demand, we use this idea of good or bad. Right? Good things happening for demand, bad things happening for demand. So if good things happened for demand, we would shift it to the right. And if bad things happened, we would shift left, right? If it was something bad for demand. So that was something like this. We'll do bad over here and good over here. Remember, we would just draw a graph. And we would have our demand curve that we started with. So this would be AD1 and we'll say AD1, aggregate demand 1. And if it was something bad, well, we would shift to the left and draw a new curve, aggregate demand 2. And if it was a good situation, something good happened for demand, well, we would have our original aggregate demand AD1. And then something good happens shifting it to the right where we would have AD2 out here, right? Aggregate demand 2. Let me get out of the way. Right? So that should look familiar except the only little difference is how we're labeling these graphs now. We've got our price level instead of just price, it's the price level in the whole economy and we've got GDP, the amount of GDP demanded. And here we've got price level. Same thing in GDP. Right? So this is how we're going to be thinking of it when we're shifting the aggregate demand curve and aggregate supply curve. Right?
Let's start here with aggregate demand and let's see what are some of the factors that can shift our aggregate demand left or right. Remember, aggregate demand is made up of those consumptions, investment, government purchases, and net exports. How could something change within consumption that could lead for a shift in the aggregate demand curve investment, right? We're going to see all of those different factors. Remember, the price level can't be one of these factors because the price level is on our graph. So if the price level changes, well, we're just moving along the graph. Right? We would just move from one point here on the curve to another point on the same curve from the price level changing. So let's start here with consumption and let's think about the different things that can affect it. First is interest rates. So if interest rates go up, what's going to happen? Interest rates go up, people are going to save more, right? Savings are going to go up. So when savings go up, well consumption goes down, right? Because whatever income you make, you're either going to use it now to consume or you're going to save it for later. So if savings go up, consumption is going to go down, which is going to lead aggregate demand to go down. Right? Because if consumption goes down, well that's part of aggregate demand leading aggregate demand to go down. About income taxes, well, if income taxes go up, well, we have less income, less disposable income left over to spend on whatever we want. If we have less disposable income left, well, we're going to consume less which is going to shift our aggregate demand down as well, right? So these are shifts left, right? When I say down it's the same as left. It's like a bad thing happening for aggregate demand so it’d be a shift left. And obviously, the opposite. If interest rates go down, there's less savings, more consumption, and more aggregate demand, lower income taxes while we have more money available, consumption goes up, right? So all of these go vice versa. We're only going to talk about one way because I think this I've chosen which way I think it's easier to kind of think about this and then the other way is just the opposite. So how about the next one? Expected income is another thing that could affect our aggregate demand. If you think you're going to make more money in the future, well, you might spend a little more now. Right? You think there's a bonus coming in something like that? Well, you would spend a little more now and your consumption would go up and aggregate demand would go up, right? Expected income goes up. Well, that's a good thing for consumption.
Let's move on to the next one here, investment. So factors that affect investment. Again, interest rates. Just like interest rates affected consumption, well, they're going to affect investment as well. However, it's for different reasons, right? Because interest rates, the firms are asking for loans to make investments in buildings and equipment, machineries, factories, right? So, when they take out these loans, they want lower interest rates. So if these interest rates are going up, there's going to beiless investment, leading to lower aggregate demand. About taxes, very similar to consumption, right? Higher taxes. Well, there's less money available. We're paying more taxes. We have less to invest. So there's less aggregate demand as well. And how about the next one, expected profit? What do you guys think about this one? One? A lot of these are very logical. If expected profit goes up, well, if we think we're going to make more money, we're going to want to invest in machinery and keep up with that demand to keep making more money. Right? So if we're expecting more profit, we're going to invest more which is going to lead to more aggregate demand as well. Now, let's go to the next one, factors that affect government purchases. Now, we're not going to get too deep into government purchases in this model. We tend to leave the discussions of government when we talk about monetary policy and fiscal policy, which we go into a lot of detail in later chapters, right? So at this point, we just talk about government purchases and we just say, well, if there's more government purchases, well, then there's more aggregate demand, right? And that's just because a higher level of government purchases leads to higher aggregate demand. It's one of the components of aggregate demand. And then finally, net exports. So this one deals with foreigners here and we got to think about the difference in the growth and the difference in exchange rates between the US and foreign countries. So relative growth rates, if the USA has a lot of growth, well, that means we're making more money here. There's more income being made, means there's going to be more imports, right? Imports are going to increase because if we're spending more money, we're earning more money, we're spending more, we're going to be importing more stuff from overseas. Well, if imports goes up, that means net exports goes down, right? Because the more imports we have, remember that net exports is equal to exports minus imports. So if these imports are going up, well, that's less net exports, right? So less net exports leading to less aggregate demand in that case. So when we have GDP growth, US consumers have more income which leads to more imports. Just like I said there, I kind of have it more clearly stated, right there on the page. And finally, exchange rates. This also affects net exports. So if the value of US dollars goes up, well, think about that. Each US dollar has more buying power. Right? More buying power abroad to buy foreign products. So, again, imports are going to be going up because our dollars are worth more in other countries. So net exports again goes down leading to less aggregate demand, right? So we have to think of how these differences between our country and another country's growth rate or the exchange rates is going to affect the level of imports and the level of exports. Alright? So these are things that can shift our curve. So in any of these cases, we can have our original aggregate demand curve and say that that a question said, here's your aggregate demand curve and interest rates are going up in the economy. How does this affect aggregate demand? Well, we know that higher interest rates leads to less consumption, leading to lower aggregate demand, as well as less investment as well just like we discussed here also leading to less aggregate demand. So as investment as interest rates go up, we would shift our aggregate demand curve to the left. Just like we're used to from when we studied market supply and market demand. Cool? Alright. So that's how we would shift aggregate demand. Let's go ahead and move on.
