Aggregate demand curve

What is aggregate demand?

The total planned expenditure in an economy at any given overall price level.

What does a fall in the price level cause?

An extension in demand

What does a rise in the price level cause?

a contaction in demand

What is the AD assumed to slope?

downwards ie real output falls as the price level rises

What is the income effect?

Households on fixed income can buy fewer goods and services.

What is the real balance effect?

If prices rise, the real value of people’s cash savings will fall. They may therefore save more and spend less to compensate.

What is international competitiveness?

Higher UK price level makes UK exports less competitive.

What are higher interest rates?

When the price level rises, interest rates tend to rise reducing investment and consumption

What does a change in price level do to the AD curve?

Causes a movement along the curve

In the short run, what does shifts in the long run cause?

fluctuations in the economy output of goods and services.

What will an increase in a component of AD do?

shifts the curve right.

What causes the demand curve to shift to the left?

A rise in imports

What does the governments budget deficit do to AD?

AD will fall.

What is the acronym that tells you the affect of the changes in exchange rate?

SPICED

(Strong pound imports cheaper, exports dearer