课 5, 主题 11

In Progress

← Previous Next→

aggregate-demand-ad

课 Progress

0% Complete

An Introduction to Aggregate Demand

Aggregate demand (AD) is the total demand for all goods and services in an economy at any given average price level
Its value is often calculated using the expenditure approach
- AD = Consumption (C) + Investment (I) + Government spending (G) + (Exports-Imports) (X-M)
- AD = C + I + G + (X-M)
Consumption is the total spending on goods and services by consumers (households) in an economy
Investment is the total spending on capital goods by firms
Government spending is the total spending by the government in the economy
- Includes public sector salaries, payments for provision of merit and public goods etc.
- It does not include transfer payments
Net exports are the difference between the revenue gained from selling goods or services abroad and the expenditure on goods or services from abroad
- Individuals, firms and governments export and import
The relationship between the average price level and the total output in an economy is shown with an aggregate demand (AD) curve

Whenever there is a change in the average price level (AP) in an economy, there is a movement along the aggregate demand (AD) curve

An increase in the AP (ceteris paribus) from AP₁→ AP₂ leads to a movement along the AD curve from A → B
- There is a contraction of real GDP from Y₁ → Y₂
A decrease in the AP (ceteris paribus) from AP₁ → AP₃ leads to a movement along the AD curve from A → C
- There is an expansion of real GDP (output) from Y₁ → Y₃

Whenever there is a change in any of the determinants of aggregate demand (AD) in an economy, there is a shift of the entire AD curve

An increase in any one of the determinants of aggregate demand (AD) results in a shift right of the entire curve from AD₁ → AD₂
- At every price level, real GDP has increased from Y₁ → Y₂
A decrease in any one of the determinants of AD results in a shift left of the entire curve from AD₁ → AD₃
- At every price level, real GDP has decreased from Y₁ → Y₃

AD = Consumption (C) + investment (I) + Government Spending (G) + (Exports (X) – Imports (M))
Each of these components are influenced by a range of factors and any change to one of them has the potential to shift the aggregate demand curve
If numerous factors change at the same time, the net effect will determine which way—and how far—the aggregate demand shifts

Consumption is the total spending on goods and services by consumers (households) in an economy
The level of disposable income that households have impacts the level of consumption
- Consumption increases as disposable income increases
- Consumption decreases as disposable income decreases

Factors that Cause a Change in the Level of Consumption

Factor	Explanation
Changes in interest rates	Interest rates are set by the government’s Central Bank Changes to the base rate cause commercial banks to change the lending and saving rates they offer customers A change in interest rates will change the level of consumer spending and savings If interest rates increase there is a greater incentive to save More saving = less consumption If interest rates increase, the monthly repayment on any loan or mortgage increases Higher loan repayments = less consumption
Changes in consumer confidence	The stronger the economy, the higher consumer confidence Consumers feel secure in their jobs and are confident of receiving regular salary payments Consumption increases and saving decreases In a weakening or recessionary economy, consumer confidence falls Consumers feel less secu

Factor

Explanation

Changes in interest rates

Interest rates are set by the government’s Central Bank
- Changes to the base rate cause commercial banks to change the lending and saving rates they offer customers
A change in interest rates will change the level of consumer spending and savings
- If interest rates increase there is a greater incentive to save
  - More saving = less consumption
- If interest rates increase, the monthly repayment on any loan or mortgage increases
  - Higher loan repayments = less consumption

Changes in consumer confidence

The stronger the economy, the higher consumer confidence
- Consumers feel secure in their jobs and are confident of receiving regular salary payments
  - Consumption increases and saving decreases
In a weakening or recessionary economy, consumer confidence falls
- Consumers feel less secu