1.2 Aggregate Demand

Aggregate demand

The total demand for a country’s goods and services at a given price level and in a given time period

Aggregate demand formula

C + I + G + (X-M)

C

Consumer expenditure/consumption

Influenced by disposable income, prices, wealth, age, interest rates, inflation, consumer confidence and personal circumstances

I

Investment - an asset or item acquired with the goal of generating income or appreciation.

Influenced by interest rates, business confidence, profit and the government

G

Government spending

Depends on the government’s view on the extent of market failure occurring in the economy

X-M

Net exports - foreigners’ spending on the country’s goods and services minus spending by the country’s population on imports

Influenced by real disposable income abroad, the exchange rate, degree of protectionism

GDP (Gross Domestic Product)

The total value of goods and services produced in an economy in a specific time period

GDP per capita is GDP divided by the population of a country

Aggregate demand curve

Slopes downward as it is inversely affected by the price level

A rise in the price level causes a contraction in AD

A fall in the price level causes an extension of AD

Factors that cause a shift of the AD curve

Net exports, government spending, interest rates, wealth, consumer confidence, depreciation/appreciation, taxes, external shocks

Monetary policy

Changes regarding interest rates, supply of money, credit and exchange rates

Fiscal policy

Changes regarding taxation, government spending and government borrowing