Define the term ‘Aggregate Demand’ and explain why the AD curve slopes downwards from left to right.

Question 1

AGGREGATE DEMAND DEFINITION

Answer 1

aggregate demand is the total demand for all goods and services in an economy

Question 2

real Income effect

Answer 2

at a lower price level the spending power of consumers income is greater and therefore they are able to buy more goods and services

Question 3

International effect

Answer 3

At lower price levels, domestic prices become relatively cheaper and so the number of exports increase

Question 4

The interest rate effect

Answer 4

at high price levels consumers and firms do not make large deposits at the bank and so there are few ‘loanable funds’, which causes interest rates to rise which in turn causes investment and consumption to fall.