Economics Edexcel - Flashcards 2.2 - aggregate demand

,




What is AD ?
What are the components of AD ?
QUESTION


Aggregate demand: total level of real expenditure on the goods
and services produced by a country.
Government spending: 25%
Consumer spending: 60% 7

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

& 7
W
Imports: 35%
Investment: 15% Exports: 30%
Net trade: -5%
ANSWER

, The AD curve

• What does the AD curve show ?
• Why is the AD curve downward sloping?




QUESTION



The AD curve shows that as general price levels fall, real output will increase.




The AD curve is downward sloping as…
• The real balance effect: when the price level rises the purchasing power of
households falls this leads to a decrease in demand for real output.
• Interest rate effect: a higher price level leads to an increased demand for money, as a
result interest rates rise reducing consumption causing a contraction in AD.
• International trade effect: a rise in the price level (relative to other countries) causes
a decrease in the UKs international competitiveness, causing a decrease in demand
for exports and rise in demand for imports. This leads to a contraction in AD.




ANSWER