Aggregate Demand

Aggregate Demand

1. comprises total planned spending on the real output that the economy produces

   • AD = C + I + G + (X - M)
     • Consumption + investment + government spending + net exports (exports - imports)
       • households = consumption
       • firms = investment
       • government spending = government
       • net export = overseas market respectively

2. 1. Consumption + (savings) - determinants.

   • Interest rates
     • high interest = reward savers - consumption falls
   • level of income
     • higher income - higher consumption
   • expected future income
     • saving usually is followed by dissaving
   • wealth
     • household wealth rises - consumption rises
   • confidence
     • confidence increases - spend more save less

3. 2. Investment - total planned spending by firms on capital goods - determinants.

   • rate of interest
     • cost of borrowing - low interest = invest more
   • business confidence
     • investment increases as confidence grows
   • technical progress
     • machinery eventually becomes obsolete - firms invest in new machinery
   • accelerator
     • number that links the change in output to the extra capital needed to produce the additional output

4. 3. Government sector (source of AD + leakage from circular flow)

   • budget surplus
     • net leakage
   • budget deficit
     • injecting spending +demand into economy