Aggregate Demand

• components: government spending, consumer spending, investment, net exports
• net exports is the value of the current account on the balance of payments
• downward slope in AD curve:

  • higher prices erodes real incomes - less valuable
  • this decreases consumer spending as goods are less afforable
  • Imported goods are more attractive as they are cheaper
  • leads to a bigger current account deficit
• lower interest rates influences consumer spending because it is cheaper to borrow. reduces the incentive to save. HOWEVER there are time lags between the change in interest rates and rise in consumption - it wont happen immediately
• consumer confidence influences consumer spending because higher confidence results in consumers feeling less concerned about needing to save for the futre
• if consumers fear higher taxes or unemployment - they will spend less and save more and will delay purchases
• economic growth influences investment because higher economic growth = more revenue for firms = more profits to invest in capital goods
• business confidence influences investment because if they expect a high rate of return, they will invest more
• demand for exports influences investment because higher demand leads to more investment as they expect more sales so capital goods will be directed into markets where consumer demand is high