2.2.1 The characteristics of AD

• Components of Aggregate Demand (AD): C + I + G + (X - M) - 1


  - Consumption (C):

  
  

  This is the spending by households on goods and services. It is influenced by factors like income, interest rates, and consumer confidence

  
  

  -Investment (I):

  
  

  Investment refers to spending by businesses on capital goods, such as machinery, buildings, and technology. It is influenced by interest rates, business expectations, and government policies
• Components of Aggregate Demand (AD): C + I + G + (X - M) - 2


  -Government Spending (G):

  
  

  This represents government expenditure on public goods and services, such as education, defense, and infrastructure.

  
  

  -Net Exports (X - M):

  
  

  This accounts for the difference between a country's exports (X) and imports (M). A positive value indicates a trade surplus, while a negative value indicates a trade deficit.
• Define Aggregate Demand


  Aggregate Demand (AD) represents the total spending in an economy at different price levels.

  
  

  It is the sum of the components: C + I + G + (X - M)
• The Relative Importance of the Components of AD (1)


  Consumption (C): In many economies, consumption is the largest component of AD. It tends to be stable and less volatile than other components.

  
  

  Investment (I): Investment can be highly volatile, especially during economic downturns when businesses may delay or reduce capital expenditures.
• The Relative Importance of the Components of AD (2)


  Government Spending (G): Government spending can be used as a policy tool to stabilize the economy during recessions and boost AD.

  
  

  Net Exports (X - M): In open economies, the balance of trade can significantly impact AD. Countries with trade surpluses (X > M) contribute positively to AD, while those with trade deficits (X < M) detract from AD.
• What does the AD curve show?


  shows the relationship between the overall price level (P) in the economy and the quantity of Real GDP demanded (Y).

  
  

  It typically slopes downward, indicating that as prices rise (inflation), the quantity of Real GDP demanded falls, and vice versa.
• Movement along the AD curve


  This occurs when there is a change in the price level (P) while other factors affecting AD remain constant.

  
  

  A change in P leads to a change in the quantity of Real GDP demanded, but the AD curve itself does not shift.
• Shift in the AD curve


  This occurs when factors other than the price level change, leading to a shift in the entire AD curve.

  
  

  These factors include changes in consumer spending, business investment, government spending, or net exports.