Aggregate Demand

Forumla

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

diagram

Why the AD curve slopes downwards

Falling real incomes - As APL rises, real incomes fall - consumers less willing and able to buy

Interest rates - As APL rises, demand for money increases, rise in interest rates, less consumer demand

Shifts in AD curve

Any changes in makeup will shift AD

Changes in consumption

• changes in income taxes - less disposable income - consumption decreases - AD falls

• changes in interest rates - less borrowing - consumption decreases - AD falls

• changes in wealth - house price increases - feel more confident and wealthy - consumption increases - AD rises

Changes in investment

• changes in interest rates - if they increase - less spending and more saving

• changes in business taxes - increase - firms have less money to invest

Changes in government spending

• new schools, hospitals, - increased spending

• governments correct market failure - increased spending

• gov spending falls - decreased AD

Changes in net exports

• chinese income rises - more chinese consumption - more exports to china

• stronger excgange rates - exports more expensive to foreginers - less exports

• national income rises - imports now cheaper