aggregate demand

• aggregate demand

  the total level of spending in the economy

  C+I+G+X-M
• what does the AD curve show

  the relationship between the general price level and real GDP.

  shows how much national output GDP will be demanded at each level of prices
• reasons why the AD curve will be downward sloping

  income effect

  substitution effect

  real balance effect

  interest rate effect
• income effect

  if prices have risen but peoples incomes haven't increased, they cannot buy all the goods that they used to.

  leads to a decrease in real income, therefore rise in prices lead to fall in AD
• substitution effect

  increase in prices in the UK leads to less foreigners wanting to buy goods from the UK, leading to fall in AD

  UK residents also see that British goods are more expensive so import cheaper foreign goods
• real balance effect

  increase in prices means that bank balances cannot pay for as much as they used to so we decide to keep money in reserves. if we want more money in reserves, we will not be able to spend as much, so fall in AD
• interest rate effect

  if demand increases and supply doesn't, then prices rise

  higher interest rates mean people will save instead of buying goods and services so AD falls