2.2.1 Characteristics of Aggregate Demand

What is aggregate Demand?

the total planned real expenditure on a country’s goods and services produced within an economy in each time period.

What are the 5 components of Aggregate Demand

• Household spending on domestic (produced within the home country) goods and services (C-consumption)

• Gross Fixed Capital Investment spending and the value of Change in Stock (I-investment)

• Government Spending on public services (G-gov spending)

• Exports of goods and services (X- exports)

• (minus - taxing money out of the circular flow (withdrawal)) Imports of Goods and Services (M-imports) 

Define investment

spending by firms on capital goods 

What is capital 

a good used to produce other goods and services E.g machinery 

Define exports

Goods and serviced bought from other Countries

What is the formula for aggregate demand?

AD = C+I+G+ (X+M)

Aggregate demand = Consumption + investment + government spending + (exports + imports)

What does C+I+G represent?

C+I+D = Domestic demand

What does (X+M) represent?

net exports (trade balance)

Which part of the components of AD and National Income is most significant?

Consumption

Here are the pie charts for the AD and National income (UK vs India)

What do aggregate demand curves show

the aggregate demand curve shows a relationship between aggregate demand and the general price level

Here is a aggregate demand curve. Please annotate?

How much have UK food prices risen by?

30% increase (causing people to buy less)

As price level fall what happens?

• our spending power increases

• we are more willing to spend

• imports fall (people start buying home goods)

What are the three ‘effects' for a downward-sloping AD curve?

• Real income effect

• Balance of trade effect

• Interest rate effect

What is the real income effect?

As the price level falls, the real value of income rises, and consumers can buy more of what they want or need

What is the balance of trade effect?

A fall in the relative price level of Country X could make foreign-produce goods and services more expensive, causing a rise in exports and a fall in imports.

What is the interest rate effect?

If price inflation is low and this might lead to a reduction in interest rates if the central bank has a given inflation target. Lower interest rates means there is less incentive to save and a fall in interest rates may cause the exchange rate to depreciate and improve exports

income definition

the flow of money received by households for providing factors of income

Define inflation

the sustained increase in general price levels of goods and services overtime

Define depreciation

the process of allocating the cost of a tangible asset over its useful life.

Describe what an outward shift is in an AD curve

A level of demand at each price level. One or more of the components of AD must have changed. 

Describe what an inward shift is in an AD curve

Inward shift of AD means that the total expenditure on goods and service at each price level has fallen

Here is an outward shift in the AD curve 

Here is an Inward shift AD curve

Define expenditure

• aggregate spending by households, firms, the government, and overseas buyers.