Aggregate demand and the price level, and reasons for the inverse relationship:
1.Falling real incomes - As the price level rises, the real value of people’s incomes fall and consumers are less able to buy the items they want or need.
2. The balance of trade - A persistent rise in the price of level of Country X could make foreign-produced goods and services cheaper in price terms, causing a fall in exports and a rise in imports. This will lead to a reduction in net trade and a contraction in AD
3.Interest rate effect - if the price level rises, this causes inflation and an increase in the demand for money and a possible rise in interest rates with a deflationary effect on the economy.
Factors causing a shift in aggregate demand curve:
1. Changes in Expectations (Current spending is affected by anticipated income and inflation)
2.Changes in Monetary Policy (i.e. a change in interest rates)
3.Changes in Fiscal Policy ( Fiscal Policy refers to changes in government spending, taxation and borrowing)
4.Economic events in the world economy ( International factors such as the exchange rate and foreign income)
5.Changes in household wealth6.Changes in the supply of credit
Exports are an injection into the circular flow of income and an component of AD
