Question 1

when the government raises taxes, the consumers spend less, so the aggregate demand is less. But the money that was given as taxes go to the government. That means that government spending should increase. Does all of this mean that the actual left and right movement of the demand curve result in no movement of the curve, and thus no change in GDP?

Accepted Answer

Taxation produces a deadweight loss (refer to the microeconomics videos). Therefore, taxation would cause the GDP to decrease, all other things being equal.

Question 2

I don't quite understand how the saving interest rate effect works out. If saving rates go up and by extension investment goes up and thus Real GDP grows, isn't there something else happening as well. As Saving rates go up, money spent is going down. Essentially, as saving rates go up, people will spend less (spending rates going down) and as we all know spending rates going down dramatically are almost always associated with slumps in the economy. So how can these both work at the same time? If investment spending increases and thus more business is made etc. , who will buy form those businesses if spending rates are low?

Accepted Answer

As saving rates go up, money spent does not go down. When a person saves money, they give the money to a bank and the bank promises to return that money upon request. In the meantime, what does the bank do with the money? The bank might invest it, in which case the money goes to some firm and is spent building new factories, buying the inputs to production, or paying employees. The bank might loan it to individuals, congratulations, you just bought somebody a new car. Or the bank might loan the money to the federal government by buying treasury certificates, in which case the federal government will spend it (along with trillions of other dollars that they don't have). So if you save money, you haven't reduced spending, you've just allowed other people to spend your money for you.

This all assumes of course, that people save money by depositing it in a bank. If money is saved by stuffing cash into a mattress, then yes, spending does go down, but not many people do that any more.

This all assumes of course, that people save money by depositing it in a bank.  If money is saved by stuffing cash into a mattress, then yes, spending does go down, but not many people do that any more.

Question 3

Shouldn't an overall decrease in the prices of all the goods decrease the GDP of the country because the GDP is defined as the sum of prices of all the goods produced ? ( considering the production does not increase too much ).

Accepted Answer

Yes, the *nominal GDP* will decrease if the prices of all goods and services are falling.

Question 4

if the price goes down would lead real GDP growth, isn't it contradict with deflation theory ...cuz deflation is price goes down

Accepted Answer

In your statement, you're assuming that the fall in the price levels do not affect anything else. The source is very important. If the fall in price levels is due to fall in demand. It is self-explanatory to say that the GDP will fall. 
Another source is a new technological discovery or fall in the price levels of oil (anything that reduces cost of production) then it is clear that this would lead to gdp growth. My point is the source is very important.
But for your question lets forget the source and think about the consequences. Deflation is known to have a cyclical effect. For instance, a fall in prices -> fall in income for businesses -> fall in wages/people laid off -> fall in personal income -> fall in demand -> fall in prices (back again). That's why people are scared of it.
Apologies if I made it complicated. An economy always is :p

Question 5

In the case of a tax cut, how can AD shift to the right if indeed people might spend more, which increases consumption, but now the government does not receive that money from the taxes and reduces its government spending in the same amount.?

Accepted Answer

Sal said that the scenario was specifically about a tax cut but not a corresponding spending cut, so the government creates a deficit. If there were a tax cut with a corresponding spending cut, aggregate demand would not change.

Question 6

So if it's a change in price level that effects consumption, investment, etc then you don't shift the graph, but if it's the other way around then you shift the graph?

Accepted Answer

If it is a change in the prive level you shift along the graph, If it is a change in demand you shift the graph. (Consumption, investments etc. are a change in demand.)

Question 7

At 2:30, Sal said C, I, G and NX make up the real GDP. Aren't these the components of aggregate demand? If yes, then how is real GDP and AD made up of the same factors? Doesn't price have anything to do with it?!

Accepted Answer

No.  Y = C + I + G + NX.  
This is two ways of looking at the same thing. 
Income = expenditures.  Every dollar spent by someone is income to someone else, so they have to be equal.  The price level does not matter here because the price to the seller is the same as the price from the buyer.

Question 8

Since a change in Price causes a change in Consumption, Investment, and/or Net Exports, why does that NOT shift the Aggregate Demand Curve, but rather causes a movement along the curve, yet any policy that causes a change in C or I DOES shift the AD Curve?
I hope my question was clear enough! :)

Accepted Answer

This is a common trap for economics students to fall into! :-) Think back to the law of demand that you learned earlier: An increase in price leads to a decrease in the quantity demanded of a good or service, and vice-versa. The _willingness and ability of consumers to purchase the product_ doesn't change in response to changes in price, but only in response to various non-price determinants, such as changes in tastes/preferences, number of customers, _etc._

For instance, reducing the price of blue jeans will increase the _quantity demanded_ of blue jeans. A change in young people's taste toward torn jeans will shift the overall demand curve for blue jeans to the right, representing an increased willingness and ability to buy blue jeans at each price.

This is true of all types of spending or consumption demand curves. For instance, on the Investment Demand curve, as the price to borrow money (the real interest rate) falls, the quantity of Investment increases. But the actual willingness and ability of businesses to invest at each real interest rate will only change -- that is shift the ID curve -- in response to factors other than the r%, such as existing capital stock or expected returns on the investment.

Now, think of Aggregate Demand as just what term says: It's the sum total of every demand curve that exists in the macroeconomy. Thus, the Law of Demand holds for AD just as it does for single-product demand curves: As overall price level falls, the quantity demanded of all goods and services will increase; and thus, Real GDP (output) will increase to meet that consumer demand. AD, measuring the combined willingness and ability of all consumers in the nation, will only shift (increase or decrease) in response to the non-price determinants of AD you learned in class.

Question 9

and doesnt Y stand for income??

Accepted Answer

Income or production, they are the same. 
What we produce is what we earn, in the aggregate.

Macroeconomics

Course: Macroeconomics > Unit 3

Shifts in aggregate demand

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