2.2.1 The characteristics of AD

Question 1

What are the components of AD

Answer 1

Consumption + Investment + Government Expenditure + (Exports - imports)

Question 2

What is AD

Answer 2

The total amount of planned spending on goods and services at any price level in an economy

Question 3

Why would a movement along the AD curve occur

Answer 3

When there’s a change in price level caused by factors that are not related to AD, I.e. changes in aggregate supply
For example: a fall in oil prices causes a decrease in the cost of production for all firms leading to an expansion in AD and a fall in price level

Question 4

Why would a shift in AD occur

Answer 4

When any of the components of AD change.

Question 5

What happens when AD increases

Answer 5

The average level of prices goes up (inflation) and Real output increases (economic growth)

Question 6

What happens when AD decreases

Answer 6

The average price level falls (deflation) and real output decreases (slowdown or recession)