Aggregate Demand

Aggregate Demand

1. The total planned expenditure on goods and services at any price level in the economy

2. Aggregate demand curve

   • can be straight or a curve
   • shows that general price level falls
     • national income, output or spending will increase
   • Slopes downwards
     • due to
       • The real balance effect
         • a decrease i the price level increases the real value of money
           • The larger the quantity of real money
             • The larger the quantity of goods and services demanded
       • The international Trade effect
         • if UK goods become cheaper
           • UK people will buy more UK goods
             • Fall in imports
           • foreigners will buy more British products
             • Increase in exports
       • The substitution effect
         • over time, for various reasons
           • a fall in price level results in lower interest rates
             • There is a shift in aggregate demand from the future to the present
               • Increasing the quantity of goods demanded today

3. Componets of AD

   • C
     • Consumption
       • Household spending on g&s
       • Main component
         • 66%
       • Interest rate
         • The cost of credit
         • If they rise
           • It costs more to borrow if we spend on credit
             • This increases opp cost of spending
           • more money can be earnt saving in the bank
       • Customer confidence
         • If households feel secure in their jobs and future of the economy
           • they'll buy big
             • e.g. cars
             • What people think of the economy influences what'll actually happen
       • Wealth Effects
         • An increse in share or house rprices
           • means people are willing and able to spend more
       • Level of employment and wage rates
         • The higher level of employment
           • The more will be spent in the country
             • might lead to higher employment
   • I
     • Investment
       • An increase in capital stock
       • Interest rates
         • if interest rates rise investment falls
           • it costs more to borrow the money in order to invest
       • Confidence levels
         • if the future looks good, they'll invest for it
       • Risk
         • High risk = lower investment
       • Government decisions
         • a cut in corporation taxes will encourage firms to invest
       • Government bureacracy
         • if the government relaxes planning restrictions
           • firms are more likely to invest in building projects
   • G
     • Government expenditure
       • Governements will choose how much they spend and delibratey manipulate total spending in the economy
         • This is discretionary fiscal policy
       • Government spending is usually balanced by what is earned in taxation
         • If more is spent than earned this is a
           • fiscal/ budget deficit
             • This will increase AD
         • If government spends less than it earns this is a
           • fiscal/budget surplus
             • Leads to a contraction in AD
   • (X-M)
     • Ex ports minus imports
       • Net exports
         • Negative in UK
           • More imports than exports
         • Causes of changes
           • Change in exchange rate
             • If it rises
               • net exports will fall as exports become less competitive
                 • imports become more competitive in the domestic economy
             • this is low price elasticity
               • people take time to adjust spending
           • Changes in state of world economy
             • Value of UK exports is dependant on growth rates around the world
           • Non-price factors
             • Demand for X and M is not always dependant on price
               • e.g quality of engineering
                 • after-sales service
                   • tariffs
                     • transport costs
   • Changes in these cause
     • Shifts of AD curve

4. Movements along the AD curve

   • When there is a change in price level
     • caused by things not related to AD
       • e.g fall in oil prices
         • which would decrease the cost of production
         • would result in an expansion and a decrease in price level

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