2.2 Aggregate Demand

Aggregate demand

Aggregate demand is the total demand for all goods and services in an economy at any given average price level.

Aggregate demand formula

Aggregate demand is calculated using the formula

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

Consumption

Consumption is the total spending on goods/services by consumers (households) in an economy.

What does investment mean in the context of AD?

Investment is the total spending on capital goods by firms.

What is government spending in the context of AD?

Government spending is the total spending by the government in the economy, excluding transfer payments.

Net Exports

Net exports are the difference between the revenue gained from selling goods and services abroad and the expenditure on goods and services from abroad.

Is the AD curve upwards or downward sloping

Downwards

The three reasons are:

• the interest rate effect

• the wealth effect

• the exchange rate effect.

What causes a movement along the AD curve?

A movement along the AD curve is caused by a change in the average price level in an economy.

What causes a shift of the entire AD curve?

A shift of the entire AD curve is caused by a change in any of the components of aggregate demand

Disposable Income

Disposable income is the money that households have left from their salary or wages after they have paid their direct taxes and have received any transfer payments or benefits.

What is investment in the context of AD?

Investment is the total spending on capital goods by firms.

Depriciation

Depreciation is the decrease in monetary valueof a capital good (asset) over time.

Gross investment

Gross investment is the total amount of spending on capital goods, including replacing old capital goods and purchasing new ones.

What is government expenditure in AD?

Government expenditure is the total spendingby the government in the economy.

Fiscal policy

Fiscal policy is the government's use of spending and taxation to influence the economy.

Net trade balance

The net trade balance is the difference between the value of exports and imports (X-M).