2.2.1 - The characteristics of Aggregate Demand

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Created by
Tayyibah Hussain

Cards (6)

  • Aggregate demand (AD) is the total level of spending in the economy at any given price
  • AD= C+I+G+(X-M)
  • Consumption (C): This is the spending by households on goods and services. It is influenced by factors like income, interest rates, and consumer confidence.Example: During a recession, households may reduce their consumption due to uncertainty about the future, leading to a decrease in C.
  • Investment (I): Investment refers to spending by businesses on capital goods, such as machinery, buildings, and technology. It is influenced by interest rates, business expectations, and government policies.Example: Lower interest rates may encourage businesses to invest in new equipment and expand production.
  • Government Spending (G): This represents government expenditure on public goods and services, such as education, defence, and infrastructure. Example: A government may increase G by investing in a new highway project to stimulate economic activity and job creation.
  • Net Exports (X - M): This accounts for the difference between a country's exports (X) and imports (M). A positive value indicates a trade surplus, while a negative value indicates a trade deficit.Example: China's high level of exports relative to imports has contributed to its significant trade surplus.