Aggregate Demand (AD)

Question 1

AGGREGATE DEMAND

Answer 1

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

Question 2

what components is AD made up of?

Answer 2

C + I + G + X - M

consumption + investment + government spending/expenditure + exports/net trade - imports

Question 3

what remains the same along the AD curve and what is this called/meaning?

Answer 3

total expenditure in the economy - real balance effect
real balance effect - means that when prices fall people still spend approximately the same amount in total but they buy a larger amount of items.

Question 4

what is the microeconomic analysis?

Answer 4

when higher prices cannot be avoided by buying cheaper alternatives so the total area under the AD curve remains approximately the same whatever the price level.

Question 5

what causes a movement along the AD curve?

Answer 5

when there is a change in the price level caused by factors that aren’t related to aggregate demand

Question 6

when does AD shift?

Answer 6

when any one of the components changes

Question 7

what does the size of the change to the components depend on?

Answer 7

the multiplier effect

Question 8

what will change when AD shifts?

Answer 8

the price level and the equilibrium real output

Question 9

what do we expect to happen when AD increases?

Answer 9

average price level to rise (inflation)
and
real output to increase (economic growth)

Question 10

what do we expect to happen when AD decreases?

Answer 10

average price level to fall (deflation)
and
real output to decrease (slowdown or recession)