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AS Economics
PowerPoint Briefings 2006



Theory of Aggregate Demand
AS Level Macroeconomics




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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…

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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)
·…

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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
(e.g. a fall in the value of sterling against the
Euro or the US dollar)




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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. the effects of a recession in the United
States
­ A cyclical recovery within the Euro Zone…

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