Aggregate Demand and Aggregate Supply Analysis Flashcards
What is aggregate demand?
The total demand in the economy
What does aggregate demand measure?
Spending on goods and services by consumer, firms, the government and overseas consumers and firms
How does the AD curve work?
Changes in general price level causes movements along the demand curve
Why does the AD curve have a downwards slope?
Higher prices lead to a fall in the value of real GDP so goods and services become less affordable in real terms
What is the AD curve?
A downwards slope with the general price level on the y-axis and real GDP on the x-axis
How does high inflation affect aggregate demand?
High inflation means the average price level is high. This means foreign goods seem cheaper - causing more imports. Therefore the deficit on the current account might increase and AD would fall.
How does high inflation affect interest rates?
High inflation means interest rates are higher. This discourages spending since saving becomes more attractive and borrowing becomes more expensive
What causes a change in aggregate demand?
Changes in its components (consumption, investment, government spending or imports/exports)
What happens to the AD curve when there is a rise in AD?
It shifts to the left
What causes a leftward shift in the AD curve?
- High confidence levels
- Low interest rates
- Lower taxes
- An increase in government spending
- Depreciation in a currency
What is a rise in aggregate demand?
A rise in economic growth
How do high levels of confidence cause a leftward shift in the AD curve?
When consumers and firms have high confidence levels they invest and spend more as they believe they will get higher returns
How do low interest rates cause a leftward shift in the AD curve?
It is cheaper to borrow and reduces the investment to save, so spending and investment increases. However, there is a time lag between a change in interest rate and the rise in AD, meaning it is not suitable if the rise in AD is needed
What is the wealth effect?
Most people own their houses so when house prices rise people feel wealthier and are likely to spend more
What happens when credit is more available?
Spending and investment might increase
