2- Aggregate Demand Flashcards
Aggregate demand definition
The total level of planned real expenditure (demand) for all goods and services in an economy at any given price level.
Aggregate demand formula
C + I + G + (X-M)
Components of AD
- Consumption- household spending on goods and services
- Investment- spending by firms on capital
- Government spending (public services)
- Imports and exports of goods and services
AD curve shape
Downward sloping, inverse relationship between general price level and real national income.
Axis of AD curve
y axis- general price level
x axis- real national output (GDP)
What does general price level represent?
The average of all prices for all goods and services in the economy.
What does real national output represent?
Output of the economy taking into account inflation
Formula for AD (based on curve)
Nominal (money) net output / average price level
Contraction of AD?
Rise in the price level leads to a fall in demand.
Extension of AD?
Fall in price level leads to an increase in demand.
When will AD shift right?
When any of the components of AD increase
When will AD shift left?
When any of the components of AD fall
