Characteristics of AD

• What is Aggregate Demand?


  Total demand for all goods and services in an economy at a price level
• Components of Aggregate Demand

  • Consumption (C) - household spending on consumer goods
  • Investment (I) - firm spending on capital goods
  • Government spending (G)- on merit and public goods
  • Net exports (X-M) - the difference between the value of exports and imports
• Aggregate Demand curve


  Shows the relationship between the price level and the total quantity of goods and services demanded
• Increase in average price level

  Contraction of Aggregate Demand (shift to the left)
• Decrease in average price level

  Expansion of Aggregate Demand (shift to the right)
• Change in C, I, G, or (X-M)

  Shift in Aggregate Demand curve
• Increase in external factors

  Shift Aggregate Demand curve to the right
• Decrease in external factors

  Shift Aggregate Demand curve to the left
• What is the formula for Aggregate Demand?


  C + I + G + (X - M)
• What are the UK statistics for AD?

  • In the UK, consumption makes up 60% of GDP, investment 15%, government spending 20%, and net exports -5%
• Why is the AD curve sloping downwards?

  • Wealth effect
  • International substitution effect
  • Interest rate effect
• What is the difference between the Wealth Effect and the International substitution effect?


  Wealth Effect: price increase prevents consumers from buying.

  International Substitution Effect: price increase results in cheap imports and less competitive exports.