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AGGREGATE DEMAND
1
...

Aggregate demand – the total demand for goods and services produced within the economy over a period of
time
Formula: AD = C+I+G+(X-M)
C – consumer expenditure on goods and services
I – gross capital investment, i
...
investment spending on capital goods such as factories and machines
G – government spending, e
...
spending on education or the NHS
X – exports of goods and services
M – imports of goods and services
Things that can affect aggregate demand: (called ‘shocks’)
- A large rise or fall in the exchange rate – affecting export demand and second-round effects on firms
linked to export industries
- Recession in main trading partners- affecting demand for exports of goods/services
- Slump in the housing market or a big change in share prices
- An event such as the global financial crisis – a fall in the amount of credit available for borrowing by
households and businesses
- Unexpected cut or rise in interest rates or change in government taxation and spending -e
...
deep
cuts in government spending as part of fiscal austerity

2
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This can lead to a bigger eventual final effect on output and employment
...

This “demand-management approach”, designed to help overcome a shortage of capital investment,
measured the amount of government spending needed to reach a level of national income that would
prevent unemployment
...
A good example is the
fiscal stimulus introduced into the US economy by the Obama government
...
Delays in sourcing raw materials, components and finding sufficient skilled labour can limit
the initial impact of the projects
...
The final
increase in measured GDP is likely to be more than £200m
...
5
...
The final rise in GDP is £250m, the value of the multiplier is 1
...


3
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The inverse relationship between aggregate demand and the price level in the economy is due to:
- Falling real incomes – as the price level rises, the real value of people’s incomes falls, and consumers
are less able to buy the items they want
...
This will lead
to a reduction in net trade and a contraction in aggregate demand
...
This assumes
that the central bank is setting interest rates in order to meet a specified inflation target
...

Factors causing shifts:
- Changes in expectations – when confidence falls, we see an
increase in saving and businesses postpone investment
projects because of worries over weak demand and lower
expected profits
...

Changes in Fiscal Policy – income tax affects disposable income
...
An increase in overseas
incomes raises demand for exports
...

Changes in household wealth – changing share and property prices affect the level of wealth, whilst
declining asset prices can hit confidence and reduce expectations
...
Many banks and other lenders are now more reluctant to lend, and interest rates
on different loans have become more expensive

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