AQA A-Level Economics Aggregate Demand

Aggregate Demand

The total level of spending on goods and services produced in an economy during a time period

The aggregate demand curve

Shows the relationship between the price and the real output

Three factors which affect aggregate demand

Wealth Effect, Interest Effect, Balance or Trade Effect

Wealth

When the price level falls consumers are wealthier and have higher incomes in real terms, encouraging greater consumption

Interest Effect

If the price level is low the interest rate will also be low. This means greater consumption, investment and exports

Balance or Trade Effect

Lower inflation makes domestic goods more competitively priced compared to foreign goods and there will be an improvement in the balance of trade

Consumption

Consumption refers to spending by households on goods and services

Which factors increase consumption spending

Consumer confidence, household wealth, distribution of income, supply of credit

Which factors increase consumption spending

Direct and indirect taxes, interest rates

Investment

Investment refers to spending by firms on capital goods such as plant, equipment and new buildings to produce more consumer goods in the future

Which factors would increase investment

Low interest rates, supply of credit, business confidence

Which factors would decrease investment

Corporate taxes, high investment, risk and uncertainty, regulations

If investment increases

Then Aggregate Demand Curve shifts to the right

If consumption increases

Then the Aggregate Demand Curve shifts to the right

Aggregate Demand Equation

AD (Aggregate Demand) = C (Consumption) + I (Investment) + G (Government Spending) + (X (Exports) -M (Imports))

Government spending

Government spending refers to spending on state provided goods and services including public and merit goods

Merit goods

Goods that are held to be desirable for consumers, but which are underprovided by the market. Reasons for underprovision: Good may have positive externalities, or consumer ignorance about the benefits of the good.

Automatic Stabilisers

Economic policies designed to offset fluctuations in economic activity without individual intervention from the government

Capital Spending

Spending on roads, schools, hostptals etc.

Altering the economic cycle

The government may spend more to boost national income and confidence

A budget deficit will arise if spending exceeds tax revenue

Transfer payments

Pensions, unemployment benefits, business subsidies

Net Exports

Net exports refers to the value of the country's total exports minus imports (X-M)

Exchange rate

A weaker exchange rate means imports become dearer and exports cheaper

Creates a trade surplus, an increase in AD and an injection to the circular flow of income

S.P.I.C.E.D

Strong Pound Imports Cheaper Exports Dear

Protectionism

Economic policy of shielding an economy from imports

Monetary Policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

Fiscal Policy

Government policy that attempts to manage the economy by controlling taxing and spending.