2.2.1: The Characteristics Of Aggregate Demand (AD) Flashcards
What is aggregate?
The sum/combination of parts.
What is aggregate demand?
The total demand for all goods/services in an economy at a given price level over a period of time.
What are the components of aggregate demand?
-Consumption (C).
-Investment (I).
-Government spending (G).
-Net Imports (Exports - Imports) (X-M).
Aggregate demand graph:
(Axis, AD curve, labels)
What causes a movement along the AD curve?
A change in the general price level.
A rise in the price level causes a(n) ________ in AD.
Contraction.
A fall in the price level causes a(n) ________ in AD.
Extension.
What causes a shift in the AD curve?
A change in any of the components of AD (C, I, G, X, M).
What components need to increase, and what components need to decrease, for the AD curve to shift outwards?
C
I
G
M
X
C: increase.
I: increase.
G: increase.
M: increase.
X: decrease.
What components need to increase, and what components need to decrease, for the AD curve to shift inwards?
C
I
G
M
X
C: decrease.
I: decrease.
G: decrease.
M: decrease.
X: increase.
How does a rise in price affect consumption (C)?
Consumption (C) will be decreased (total expenditure is the same, but goods/services are more expensive, so people can purchase fewer goods/services).
How does a rise in price affect investment (I)?
Investment (I) will be decreased (savings might increase, as interest rates are likely to be raised at higher price levels).
How does a rise in price affect exports (X)?
Exports (X) will be decreased (less competitive due to higher prices).
How does a rise in price affect imports (M)?
Imports (M) will be increased (overseas prices will be cheaper in comparison).
What causes a rise in AD?
-Depreciation of the exchange rate.
-Tax cuts.
-Increase in house prices (wealth effect).
-Lower interest rates.
