Aggregate Demand Curve Flashcards
What happens if there is a rise in the general price level?
Contraction of Aggregate Demand
What happens if there is a fall in the general price level?
Extension of Aggregate Demand
What does it mean that the Aggregate Demand Curve slopes downwards?
Real output falls as price level rises
What factors cause the Aggregate Demand Curve to slope downwards?
Income Effect
Real Balance Effect
International Competitiveness
Higher Interest Rates
Why does the Income Effect cause the AD curve to slope downwards?
Households on fixed incomes can buy fewer goods/services
Why does the Real Balance Effect cause the AD curve to slope downwards?
If prices rise, the real value of peoples cash savings will fall
They therefore save more and spend less to compensate
Why does International Competitiveness cause the AD curve to slope downwards?
Higher UK price level makes UK exports less competitive
Why do Higher Interest Rates cause the AD curve to slope downwards?
When the price level rises, interest rates tend to rise, reducing investment and consumption
What does change in price level cause on the AD curve?
Movement along the curve
