AD Downward Sloping

• What is the shape of the Aggregate Demand curve?

  Downward sloping
• Why is it important to label the Aggregate Demand curve as AD?

  To distinguish it from microeconomic demand
• What do the axes in macroeconomics represent?

  Price level and output/GDP
• What does the point (P1, Q1) represent in the AD curve?

  Total demand and overall average price
• How does purchasing power relate to prices in an economy?

  • Lower prices increase purchasing power
  • Higher purchasing power leads to more consumption
  • Increased consumption raises GDP/output
• What happens to purchasing power when prices are low?

  It increases, allowing more purchases
• What is the Wealth Effect?

  Assets are worth more when prices decrease
• How do interest rates affect consumption and investment?

  • Lower prices lead to lower interest rates
  • Cheaper borrowing increases consumption
  • Higher investment occurs due to lower saving attractiveness
• What is the effect of low interest rates on saving behavior?

  It makes saving less attractive
• How do exports and imports relate to prices in the UK?

  • Lower UK prices increase competitiveness
  • Higher exports occur due to lower prices
  • Imports decrease as consumers prefer cheaper UK goods
• What happens to imports when UK prices are low?

  They decrease as UK goods are cheaper
• Why should candidates avoid simplistic explanations of the AD curve's slope?

  They earn few marks and lack depth
• Why is the substitution effect invalid for the AD curve?

  Only foreign goods can be substituted
• What caution has been advised by Edexcel regarding AD curve explanations?

  Use caution with substitution effect explanations