aggregate demand

• Aggregate demand is the total of all demands or expenditures on goods and services produced in an economy at a given price over a period of time.
• Savings ratio: the ratio of personal saving to household disposable income (usually expressed as a percentage).
• In economics, aggregate means a total amount.
• National expenditure is one of the three ways of calculating national income, usually measured as GDP.
• Aggregate demand, or AD, consists of four components: consumption, investment, government spending, and exports minus imports.
• The aggregate demand curve shows the relationship between the price level and the level of real expenditure in the economy.
• The price level is the average level of prices in the economy, and is usually measured in the UK using the consumer price index.
• A change in the price level is either inflation or deflation.
• Real output must equal real expenditure and real income because these are three different ways of measuring the same flow in the circular flow model of the economy.
• Demand curves are nearly always downward sloping.
• Inflation affects each component of aggregate demand as follows: consumption increases in interest rates and decreases in real wealth, investment decreases in interest rates, government spending is assumed to be independent, and exports and imports decrease due to higher prices reducing international competitiveness.
• The wealth effect is when consumption increases because people are richer or have more real wealth.
• The trade effect is when exports increase due to a decrease in the price level, and imports decrease due to an increase in the price level, increasing x and decreasing m and therefore increasing the value of x - m.
• An interest effect is when aggregate demand changes due to changes in interest rates.
• A change in the price level results in a movement along the aggregate demand curve, referred to as either an extension or contraction.
• Higher prices lead to falls in aggregate demand.
• Consumption can be affected by variables such as the unemployment rate, feeling of security, new trends, more advanced technology, changes in population/demographics, and tax rate changes.
• If unemployment, income tax or interest rates fall, people may be less afraid of losing their jobs and therefore more willing to spend their disposable income.
• Government spending may be influenced by unexpected events such as natural disasters.
• Exports and imports are influenced by exchange rates and changes in the quality or range of goods.
• The subsequent fall of interest rates would lead to a rise in investment as more people borrow money.
• An improvement in innovation and quality of uk manufactured goods is likely to lead to a rise in exports, increasing aggregate demand.
• A rise in government spending without a change to taxation would lead to a fall in its budget surplus or a rise in its budget deficit, increasing aggregate demand, while a fall in government spending with no change to taxation would decrease aggregate demand.
• Investment can be influenced by factors such as business confidence, taxes and interest rates.
• A rise in the exchange rate is likely to lead to lower exports but higher imports as foreign goods become relatively cheaper, causing the value of x - m to fall, leading to decreased aggregate demand.
• When the ad curve shifts, it shows that there has been a change in real output at any given price level, indicating that the output has changed regardless of the price level.
• An increase in business confidence may come about because the economy is going into boom.
• Government spending can change automatically because of previous government spending commitments, or the government can announce changes to its spending.
• Government spending may be influenced by the political climate, government ideology or manifesto pledges.
• Variables that can lead to a shift of the ad curve include real variables such as changes in the willingness of consumers to spend, and changes in monetary value such as the rate of interest.
• Shifts in the aggregate demand curve will occur if there is a change in any other relevant variable apart from the price level.