2.2.1 - Aggregate demand

Question 1

What is aggregate demand (AD)?

Answer 1

It is the total of planned real expenditure on goods and services produced within a country in a given time period.

Fall in AD =
• fall in net exports
• cut in government spending

Rise in AD =
• increase in house prices
• cut in direct and indirect tax

Question 2

What is the equation/ formula for AD?

Answer 2

C+ I + G + (X - M)

Question 3

What are the components of AD?

Answer 3

• Consumer spending (C)
• Business investment (I)
• Government spending (G)
• Net exports (X-M)
  • i.e. exports - imports

C - consumer spending
I - business spending
G - government spending
(X - M) - foreign spending

Question 4

AD curve

Answer 4

• A rise in the price level causes a contraction of AD
• A fall in the price level causes an expansion of AD