Aggeragate demand

• What is aggregate demand?

  Aggregate demand is the total demand for goodd and services
• What are the components of aggregate demand?

  • Households spending on goods and services (C)
  • Gross fixed capital investment spending (I)
  • Government consumption (Public services) (G)
  • Exports of goods and services (X)
  • Minus imports of goods and services (M)
• What is the formula for calculating aggregate demand?

  Aggregate demand is calculated as $C +$$I +$$G +$$(X - M)$.
• What does real output refer to?

  Real output is the level of production at a certain price range.
• What is the real balance effect?

  The real balance effect occurs when rising price levels reduce the real value of income, making consumers less able to buy what they want or need.
• How does a persistent rise in the price level affect the balance of trade?

  A persistent rise in the price level can make foreign-produced goods and services cheaper, leading to a fall in exports and a rise in imports.
• What is the interest rate effect?


  The intrest rate effect is caused by inflation as when intrest rates rise people save more and spend less.

  Intrest rates rise due to, high levels of unemployment, prices rising, consumer spending decreaing
• What happens to aggregate demand as the price level falls?

  As the price level falls, aggregate demand decreases and average output increases.
• What happens to aggregate demand as the price level rises?

  As the price level rises, aggregate demand increases and average output decreases.
• What is the price level?

  The price level is the average price of goods.
• What is aggregate output?

  Aggregate output is the total amount of goods made.
• How does the relationship between price levels and aggregate demand work?

  • As the average price of goods falls:
  • Planned money spent on goods and services decreases
  • Average output increases
  • As the average price of goods rises:
  • Money spent on goods and services increases
  • Average output decreases
• What do businesses pay for the inputs they hire?

  Wages and rent
• How do businesses receive payments?

  From consumer spending
• What is the role of government in the circular flow model?

  To collect taxes and fund public services
• What does state spending represent in the circular flow model?

  It is labeled as G
• What is aggregate demand?

  Aggregate demand is the total demand for produced goods and services within an economy
• What are the components of aggregate demand?

  • Households spending on goods and services (C)
  • Gross fixed capital investment spending (I)
  • Government consumption (Public services) (G)
  • Exports of goods and services (X)
  • Minus imports of goods and services (M)
• How is aggregate demand calculated?

  Aggregate demand is calculated using the formula C + I + G + (X - M).
• What does real output refer to?

  Real output is the level of production at a certain price range.
• What is the real balance effect?


  The real balance effect occurs when rising price levels reduce the real value of income, making consumers less able to buy what they want or need.
• How does the balance of trade relate to aggregate demand?

  A persistent rise in the price level can make foreign-produced goods cheaper, leading to a fall in exports and a rise in imports.
• What is the interest rate effect?


  The interest rate effect states that if the price level rises, it causes inflation and an increase in demand for money, potentially raising interest rates on loans, which has a deflationary effect on consumer and business demand.
• What happens to aggregate demand as the price level falls?

  As the price level falls, aggregate demand decreases and average output increases.
• What is the relationship between average prices and planned money spent on goods and services?

  As the average price of goods falls, the level of planned money spent on goods and services decreases, and average output increases.
• What factors can cause shifts in aggregate demand?

  • Changes to monetary policy (Bank of England)
  • Changes in interest rates
  • Changes in the supply of money
  • Changes in a country's exchange rates
  • Changes to government fiscal policy (government spending)
  • Changes in the level of indirect/direct taxes
  • Changes in government (state) spending
  • Changes in government (fiscal) borrowing
  • Business and consumer confidence
  • Levels of unemployment
  • High inflation/deflation
  • Falling wages
• What are some shock events that can shift aggregate demand?

  • A large rise and fall of exchange rates
  • Weather events
  • War
  • Pandemics
  • Recession
  • Terrorism
  • Boom or fall in housing market prices
• How does an increase in aggregate demand affect the price of goods?

  An increase in aggregate demand typically leads to an increase in the price of goods.
• What is the effect of a decrease in aggregate demand on average output?

  A decrease in aggregate demand leads to a decrease in average output.
• What is the standard rate of price level referred to as P1?

  P1 is the standard rate of price level, where a fall in price level decreases aggregate demand and increases average output.
• What happens to aggregate demand when average prices of goods fall?

  Aggregate demand falls as average prices of goods fall, which leads to an increase in average output.
• What happens to aggregate demand when average prices of goods rise?

  As average prices of goods rise, aggeragate demand decreases and average output decreases
• How does consumer confidence affect aggregate demand?

  Higher consumer confidence typically leads to an increase in aggregate demand.
• What is the impact of high inflation on aggregate demand?

  High inflation can lead to a decrease in aggregate demand due to reduced purchasing power.
• How do changes in interest rates affect aggregate demand?

  Changes in interest rates can affect aggregate demand by influencing borrowing costs and consumer spending.
• What is the effect of falling wages on aggregate demand?

  Falling wages can lead to a decrease in aggregate demand as consumers have less income to spend.
• What is disposable income?



  Disposable income is the amount of income consumers have left after taxes and social security charges.
• What are the sources of consumer income?


  Consumer income comes from wages, savings, pensions, benefits, and investments.
• How do interest rates influence consumer spending?


  If interest rates are lowered, borrowing becomes cheaper, increasing spending and investment.
• What is the effect of time lags in interest rate changes on aggregate demand?


  There are time lags between the change in interest rates and the rise in AD, making it unsuitable for immediate increases in AD.