Aggregate Demand (AD)

1. Description of Aggregate Demand

1.1. The total quantity of goods and services demanded across all sectors of the economy at various price levels. The equation is: AD = C + I + G + (X – M)

2. Consumption (C)The total spending by households on goods and services. Factors

2.1. Interest rates: Lower rates reduce the cost of borrowing, increasing consumption.

2.2. Consumer confidence: Higher confidence encourages more spending.

2.3. Wealth effects: Higher house prices and stock market values can increase consumption.

2.4. Income levels: Higher disposable income boosts consumption.

3. Factors Affecting Aggregate Demand

3.1. Interest rates: Influence both consumption and investment. Lower rates tend to increase AD.

3.2. Consumer and business confidence: Optimism can lead to higher spending and investment

3.3. Government policies: Fiscal policies, such as tax cuts or increased spending, directly impact AD.

3.4. Global economy: A stronger global economy boosts exports, increasing AD.

3.5. Wealth effects: Changes in asset values, like house prices and stock markets, can impact consumption.

4. Effects of Shifts in Aggregate Demand Rightward Shift (Increase in AD):

4.1. Results from increased consumption, investment, government spending, or net exports.

4.2. Leads to higher output and possibly higher inflation.

4.3. Leads to higher output and possibly higher inflation.

5. Net Exports (X – M) Exports (X): Goods and services sold abroad. Imports (M): Goods and services bought from abroad. Factors affecting net exports:

5.1. Exchange rates: A weaker domestic currency makes exports cheaper and imports more expensive.

5.2. Global economic conditions: Strong global demand increases exports.

5.3. Trade policies: Tariffs and quotas can affect the level of exports and imports.

5.4. Competitiveness: More competitive goods/services lead to higher exports.

6. Investment (I) FactorsSpending by firms on capital goods, such as machinery and technology. Factors affecting investment:

6.1. Interest rates: Lower rates reduce the cost of borrowing for firms, boosting investment

6.2. Business confidence: More optimistic outlook leads to more investment.

6.3. Government policies: Tax incentives and subsidies can encourage investment.

6.4. Technological advancements: Encourages firms to invest in new technology.

7. Government Spending (G) Total government expenditure on goods and services. Factors affecting government spending:

7.1. Fiscal policy: Expansionary fiscal policy increases government spending.

7.2. Political priorities: Priorities such as healthcare, education, and infrastructure can influence spending levels.

7.3. Economic conditions: In a recession, governments may increase spending to stimulate demand.

8. Leftward Shift (Decrease in AD):

8.1. Occurs due to a fall in any AD component (C, I, G, or X-M).

8.2. Causes a reduction in output, potentially leading to lower inflation or even deflation.

8.3. May increase unemployment as businesses scale back production in response to lower demand.