2.2.1 Aggregate Demand

Aggregate Demand (AD)

The total spending in an economy at different price levels, consisting of consumption, investment, government spending, and net exports.

Consumption (C)

The spending by households on goods and services, influenced by factors like income, interest rates, and consumer confidence.

1. Example: During a recession, households may reduce their consumption due to uncertainty about the future, leading to a decrease in C.

Investment (I)

Spending by businesses on capital goods, such as machinery and technology, influenced by interest rates, business expectations, and government policies.

1. Example: Lower interest rates may encourage businesses to invest in new equipment and expand production.

Government Spending (G)

Expenditure by the government on public goods and services, such as education and infrastructure.

1. Example: A government may increase G by investing in a new highway project to stimulate economic activity and job creation.

Net Exports (X - M)

The difference between a country's exports and imports, indicating a trade surplus or deficit.

1. Example: China's high level of exports relative to imports has contributed to its significant trade surplus.

AD Curve

The relationship between the overall price level (P) and the quantity of Real GDP demanded (Y), typically sloping downward indicating an inverse relationship between price level and quantity demanded.

Movement Along the AD Curve

A change in the price level (P) while other factors affecting AD remain constant, resulting in a change in the quantity of Real GDP demanded (Y).

Shift of the AD Curve

A change in factors other than the price level, leading to a shift in the entire AD curve, such as changes in consumer spending, business investment, government spending, or net exports.