2.2.1: Characteristics of AD

• Aggregate demand is made up of Consumption, Investment, Government spending, and Net trade
• Formula of Aggregate demand: Consumption + Investment + Government Expenditure + (Exports - Imports)
• Consumption: Consumer spending on goods and services, about 60 % of AD
• Investment: Spending on capital goods which help to produce more consumer goods in future. Makes up about 15 % of AD
• Government Expenditure: Government spending on provision of public services
• Net trade: Exports minus imports. Makes up about 5 % of AD
• Reason the AD curve slopes downward: As prices fall, the real value of income rises, so quantity bought increases. This is called the Real income effect
• Reason the AD curve slopes downward: A fall in the price level causes increased demand for exports. This is called Balance of trade effect
• Factor shifting the AD curve:

  Real Income

  Wealth effect

  Monetary and fiscal policy

  Consumer and business confidence