aggregate demand

• The AD curve

  represents an inverse relationship between prices and the lvl of output demanded

  as prices fall from PL1 to PL2 -> output increases from Y1 to Y2

  
• what is aggregate demand

  the demand (or spending) on g/s in a specific period of time and at a given price lvl
• in macroeconomic demand...

  we consider the average price level of all goods and services against national output. 
• demand for a nations g/s includes:

  1. consumer goods by households
  2. other goods by stakeholders such as gov, firms and foreigners
• components of aggregate demand

  1. Consumption (C): total spending by consumers on g/s including durable (buildings) and non-durable (perishables) goods
  2. Investment (I): total spending by firms on capital equipment (duable goods)
  3. Government spending (G): total spending by gov on g/s (health, education, transport)
  4. Net exports (X-M): total income earned from sale of exports - expenditure on imports
• what are the two types of investment in aggregate demand?

  • replaced investment -> maintains productivity of existing capital
  • induced investment -> spends to enable increase output to respond to higher demand
• aggregate demand eventually equals gross domestic product, hence the calulating formulas are the same.
• What leads to changes in Aggregate Demand?

  A change in the price level or a change in a component of Aggregate Demand
• What happens when there is a change in the price level regarding Aggregate Demand?

  It leads to a change in the level of output demanded, moving along the AD curve
• What occurs when there is a change in a component of Aggregate Demand?

  It leads to a shift in the Aggregate Demand curve
• What factors lead to a change in Consumption (C)?

  Consumer confidence, interest rates, wealth, income taxes, level of household indebtedness, and expectations of future price levels
• What is an intangible factor that affects Consumption?

  Consumer confidence
• What causes changes in Investment (I)?

  Interest rates, business confidence, technology, business taxes, and level of corporate indebtedness
• How is business investment influenced compared to consumption?

  Business investment is influenced by similar factors to consumption
• What causes changes in Government Spending (G)?

  Taxes, publicly funded schools and universities, national defense, highways and roads, and parks and hospitals
• How does Government Spending respond to changes?

  It responds to changes in Consumption (C) and Investment (I), often influenced by elections
• What causes changes in Net Exports (X - M)?

  Income of trading partners, exchange rates, trade policies, and foreign households
• How are Net Exports influenced by legislation?

  Net Exports are influenced by legislation and taxation changes on imports and exports
• What are the two broad categories of policies that affect Aggregate Demand?

  • Fiscal policy (gov)
  • Monetary policy (RBA)
• What does fiscal policy relate to?

  Spending and tax
• What is the effect of expansionary fiscal policy on Aggregate Demand?

  It increases Aggregate Demand
• What is an example of expansionary fiscal policy?

  Lowering taxes to induce spending
• What is monetary policy related to?

  The supply of money and interest rates
• What is an example of expansionary monetary policy?

  The central bank buys bonds, which is a form of 'money creation'
• What happens when the reserve bank buys bonds?

  It releases more money into the circular flow
• What is contractionary monetary policy?

  It involves the reserve bank selling bonds, taking money out of the circular flow
• What is the role of the central bank in developed countries?

  To maintain a low rate of inflation
• How do changes in the base interest rate affect private institutions?

  They have flow-on effects to the interest rates set by private institutions
• What happens when the base interest rate is lowered?

  It reduces the cost of borrowing, leading to an increase in consumption and investment
• What is tight or contractionary monetary policy?

  It involves lifting interest rates to dampen aggregate demand
• What are the effects of expansionary and contractionary fiscal policies on Aggregate Demand?

  • Expansionary fiscal policy: Increases Aggregate Demand
  • Contractionary fiscal policy: Decreases Aggregate Demand
• What are the effects of expansionary and contractionary monetary policies on Aggregate Demand?

  • Expansionary monetary policy: Increases Aggregate Demand
  • Contractionary monetary policy: Decreases Aggregate Demand