Aggregate Demand

• Aggregate demand is the total demand for a country's goods and services at a given price level in a given time period.
• Aggregate demand is a measure of total expenditure on a country's goods and services.
• Aggregate demand is represented by the equation: Aggregate Demand = C + I + G + X - M.
• In an aggregate demand curve, a fall in the price level leads to an increase in aggregate demand or an extension of aggregate demand, which increases real GDP.
• A rise in the price level leads to a decrease in aggregate demand or a contraction of aggregate demand, which reduces real GDP.
• The downward slope of an aggregate demand curve indicates that there is an inverse relationship between the price level and real GDP.
• Changes in aggregate demand can only occur if C, I, G, or X-M increase or decrease.
• If the aggregate demand curve is downward sloping, it means that aggregate demand is changing purely for reasons related to the price level changing.
• The wealth effect states that as the price level decreases, the purchasing power of income increases in real terms, encouraging people to spend more on goods and services in the economy, which increases consumption and aggregate demand, leading to an increase in real GDP.
• The trade effect states that as the price level decreases, exports become more competitive and imports become less competitive, leading to an increase in exports and a decrease in imports, which increases aggregate demand and real GDP.
• Purely as a result of a change in the price level, the value of x minus m will increase, increasing aggregate demand and real GDP.
• At the same price level, there can be higher or lower levels of aggregate demand and therefore higher or lower levels of real GDP.
• The aggregate demand curve will shift when there is an increase or decrease in c, i, g and or x minus m but nothing to do with the price level changing.
• The interest effect states that as the price level decreases, interest rates can be kept lower in the economy because most central banks will adopt interest rate policy to meet an inflation target, stimulating higher consumption and investment.
• Consumption, investment, government spending, and net exports can all increase or decrease for reasons not related to changes in the price level, causing the aggregate demand curve to shift right or left.
• The interest effect also links purely as a result of a change in the price level, which can then affect c, i and x minus m as interest rates are lower or higher in the economy depending on what the change in the price level is.
• Factors independent of the price level can affect c, i, g and x minus m, causing the aggregate demand curve to shift.
• A greater demand for exports and the revenues generated from exports will increase, increasing x in this equation at the same time imports become less competitive because domestic goods and services are more competitive, resulting in less spending on imports and a decrease in the value of m in the bracket.
• If the price level doubles, the trade effect will occur, where imports become more competitive and there is an increase in spending on imports, increasing the value of m in the bracket and real GDP.