Ch 14 - Aggregate Demand

Aggregate demand

________: total spending on goods and services in a time period at a given price level.

Consumption

________ is the total spending by consumers on domestic goods and services.

real output

AD shows the relationship between average price level and ________.

Business expectations

________: interest rates fall, consumers will have more disposable income.

Formula of aggregate demand

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

aggregate demand shows

the  relationship between average price level and real output 

Consumption is

• More volatile and least sustainable

• Changes in income: as income rises people have to spend more

• Changes in interest rate: more incentive to save and consume less (borrowing increases, decrease in consumption)

**Investment**

firms investing into capital equipment machinery and premises 

Investments are

Rate of interest (amount firms pay to borrow money) 

Business expectations

interest rates fall, consumers will have more disposable income 

Accelerator effect

reaction of investment to the rate of change of income

Monetary policy

• Decrease in either AD will fall (growth will fall)

• Increase in either AD will increase

Monetary policy

a set of actions to control a nation's overall money supply and achieve economic growth.

Aggregate demand

total spending on goods and services in a time period at a given price level

Expectations

consumers expect prices to rise in the future they will increase their consumption if they expect prices to fall later

Investment

firms investing into capital equipment machinery and premises

Accelerator effect

reaction of investment to the rate of change of income