Aggregate demand

Aggregate demand

1. What is meant by aggregate demand?

   • Total spending on goods and services
   • AD = C + I + G + (X-M)
   • Net exports= value of exports minus imports. If net exports are negative, there is trade deficit (Reduced AD).

2. Components of AD

   • C= Consumption of goods/services by consumers
   • I= Capital Investment- spending on capital goods e.g. buildings
   • G= Government spending. E.g. transfer payments
   • X= Exports of goods and services, injections into the economy
   • M= Imports

3. Influences on demand

   • rise or fall in exchange rate
     • affects demand of exports, employment, incomes and profits of firms
   • credit crunch
   • Changes in tax and interest rates

4. AD and price levels

   • Falling real incomes- increase in price levels real value of people's incomes fall.

5. As income increases, consumption will increase.

6. as price levels increase, real incomes fall. Balance of trade decreases as exports increase. Interest rates will increase to deal with rising inflation rate.

7. AD sfifters

   • Changes in expectations- of confidence falls, saving increases. If confidence increases, spending increases.
   • changes in monetary policy- if interest rates fall, spending increases as saving reduces. But can be affected by time lag.
   • Changes in fiscal policy- income tax affects disposable income
   • changes in household wealth- higher asset prices= higher spending.
   • Change in supply of credit- whether banks are lending easily or not.