Aggregate Demand

Define AD

The total demand for goods and services within a particular market

What is the formula for AD

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

Draw an AD diagram

Why is the AD curve downward sloping

What causes a movement along the AD curve

A change in the price level

What will cause a shift in AD

A change in a component of AD (C, G, I, X or M)

What does the marginal propensity to consume (MPC) show

How much of their income consumers spend

What are the determinants of consumption

1. Direct taxes - impact disposable income

2. Interest rates

3. consumer confidence

4. wealth effect - If house prices fall, households feel less wealthy, less confident, spend less

Define Consumption

The total spending by households on goods/services within the economy

Define Investment

The addition to the capital stock of the economy by firms

What are the determinants of investment

What is fiscal policy

Decisions on government spending and taxation

What does the government spend most of its money on

Health

Education

Social protection (tax credits)

What is meant by net exports

Exports - imports = net trade balance or net exports

What are the determinants of net exports

Explain what happens to AD and sketch a diagram, if there was an increase in the rate of economic growth

AD shifts out

PL remains the same

accelerator theory —> Investment increases so AD out

Explain what happens to AD and sketch a diagram, if there was a decrease in interest rates

AD shifts out

reward for savings decreases

Cost of borrowing decreases

Consumption and Investment increases

AD out