Economics - AD/AS Analysis Definitions (Macro)

Aggregate demand

Total expenditure in an economy

Components of Aggregate Demand

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

C - Consumer Expenditure

I - Investment

G - Government expenditure

(X-M) - net exports

Consumer expenditure (C)

Spending by households on final goods and services

Investment (I)

Spending by firms on capital goods (machinery & infrastructure)

Government Expenditure (G)

Spending by government on final goods and services

Net exports (X-M)

Value of exports minus value of imports

Real Balance effect

As the price level rises, there is a fall in the real value of consumers cash assets. Consumers therefore purchase less goods and services

Balance of trade effect

An increase in the price level reduces the international competitiveness of UK goods and services. As a result the volume of exports falls and the volume of imports rises. Net exports deteriorates which cazses a contraction in aggregate demand

Interest rate effect

An increase in the price level will increase the demand for money because consumers will need to hold more money. This will push the interest rate up. As the interest rate increases, there will be less investment and consumption which causes a contraction in aggregate demand

Shifts in aggregate demand

If any component of aggregate demand changes, this will cause a shift in aggregate demand

Shifts in aggregate supply

1. An increase in the productive capacity will shift LRAS to the right

2. An increase in the costs of production will shift SRAS left

Macroeconomic equilibrium

Where AD = AS, Total expenditure = total production

Aggregate Supply

Total production in an economy