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Key Issues
· What is aggregate demand?
· What are the components of aggregate demand?
· What causes changes in aggregate demand?
· How does a change in AD cause changes in
output, employment and prices?
· Macroeconomic policy and aggregate demand
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Key concepts
· Aggregate demand
­ The total level of planned real expenditure on UK
produced goods and services
· Aggregate demand curve
­ Shows the level of planned demand for real output
consistent with a particular price level
· Exports ­ Imports
­ Also known as the current account balance of the
balance of payments
· Government spending
­ Expenditure by central and local government on goods
and services (not including welfare benefits)
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Understanding Aggregate Demand
(AD)
· Aggregate Demand (AD) =
­ Total level of planned real expenditure on UK
produced goods and services
· The components of aggregate demand
· Household Spending (C)
· Gross Fixed Capital Spending (I)
· Value of Change in Stocks (inventories)
· Government Consumption (G)
· Exports of Goods and Services (X)
· (minus) Imports of Goods and Services (M)
· AD sums to GDP (expenditure based)
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The Aggregate Demand Curve
Price Level
P2
P1
AD1
Y2 Y1 Real National Output
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The Aggregate Demand Curve
Price Level
P2
P1
P3
AD1
Y2 Y1 Y3 Real National Output
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An Outward Shift in Aggregate Demand
Price Level
P1
AD2
AD1
Y1 Y2 RNO
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An Inward Shift in Aggregate Demand
Price Level
P1
AD3
AD4
Y4 Y3 Real National Output
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Causes of Changes in Aggregate
Demand
· Changes to Monetary Policy
­ Changes in official base interest rates by the
Bank of England
­ Fluctuations in the exchange rate for sterling
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Page 10

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Causes of Changes in Aggregate
Demand (2)
· Changes in Business & Consumer
Confidence
· Fluctuations in the growth of national
income and expenditure in other countries
(the global economic cycle)
­ E.g.…read more

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