Aggregate Demand

 

Aggregate Demand (AD) is the total demand for goods and services produced within the economy over a period of time.

Aggregate Demand (AD) is composed of various components

AD = C+I+G+(X-M)

 

AD slopes downwards because:

 

Shifts in the Aggregate Demand curve

ad

 

Graph to show Increase in AD

An increase in AD (shift to the right of the curve) could be caused by a variety of factors

1. Increased Consumption:

i) An increase in consumers wealth (higher house prices or value of shares)

ii) Lower Interest Rate which make borrowing cheaper therefore people spend more on credit cards. Also mortgage payments are cheaper which gives people more disposable income.

iii) Higher wages

iv) Lower Taxes

v) Increased consumer confidence about the future

Consumer Expenditure accounts for about 66% of AD and therefore is a very important component of AD

 

2. Increased Investment

i) Lower interest rates, this makes borrowing for investment cheaper.
ii) Increased confidence in the economic outlook
iii) Improved technology
iv) Increased economic growth, to meet increased demand firms need to increase capacity

3. Increased G

i) Government pursues expansionary fiscal policy
ii) Governments invests in infrastructure

4. Increased X

i) UK more competitive, for example an increase in labour productivity would make the UK more competitive
ii) Increased growth in other countries, therefore they will have higher demand
iii) Lower value of Sterling, this makes exports cheaper

5. Decreased M

i) UK more competitive, this makes goods from other countries appear less competitive.
ii) Lower value of Sterling, this makes imports more expensive
iii) Lower GDP, therefore consumers will have less money to spend

Essays and Revision Notes on Economic Growth