Aggregate Demand - Chapter 14

What is AD made up of…. and what are the other words for AD?

AD = C + I + G + (x-m)

C - 67%

GDP

Y

E

O

Aggregate Demand Meaning

Total level of planned real expenditure on the goods and services produced within a country like UK.

What are words for GPL?

APL, Inflation

What is the AD curve?

What does the curve show?

At GPL1 → Y1

When the price increases from GP1 → 2, real GDP falls from Y1 → Y2, causing a contraction of AD because consumers purchasing power falls meaning consumers cannot consume as much now - the real value of money balances declines

What causes change in AD?

Change in price level, movement along AD curve, from one level of real output to another.

Increase in any components of AD, will increase AD.

Why the curve slopes downwards?

Falling real incomes - As price level rises, the real value of income falls.

Balance of trade - rise in country x, means foreign G/S causing a fall in exports/ and a rise in imports/

Why is M part of the AD curve?

You can import different parts of a product to then import it. Example, importing steel to make a stapler - making a semi finished product, fully finished.

What is ceteris paribus?

Everything else remains constant. If the price of a good increases, the quantity demanded decreases.

What do shifts of AD curve look like? - when do they happen?

When there is a shift in demand and not because of a change in price.

What does an inward/outward shift do?

Outward - will raise national output at all price levels.

Inward - will reduce national output at all price levels

Why is AD changing?

A change in any of the components of AD will cause a shift in demand curve when there is ceteris paribus → everything is equal.