Aggregate demand and aggregate supply and their interaction

Aggregate demand and supply. Components of aggregate demand. Circular flow of income and multiplier effect

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  • Created on: 24-05-11 11:39
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Economics Revision
Aggregate Demand:
Total demand for a country's good and services at a given price level and in a given time period.
1. Consumer expenditure (C)
2. Investment (I) ­ spending on capital goods
3. Government spending (G) ­ on goods and
4. Net exports (XM)
Trade surplus: The value of exports exceeding value of imports
Trade deficits: The value of imports exceeding value of exports
1. Consumption: The amount households spend on goods and services.
Low income = Spend more (100%) on needs and wants
High income = Spend less (75%) and save
Wealth ­ so more confident to spend money
Optimism ­ if economy is expected to grow people are more likely to spend
Rate of interest if low cheaper to borrow + less incentive to save so spend
Technology ­ encourage to update products
Disposable income
2. Investment: Spending by firms on capital goods (machinery, factories)
Fall in cost of capital goods
Rate of interest if low expand more because its cheaper
Technology ­ more productive equipment to invest in
Income ­ increase will cause more demand so govt's have to expand capacity + buy more
capital goods
Change in expectations ­ more optimistic about future = invest more
Cuts in corporation tax (a tax on firms profit)
3. Government spending: Spending by governments on defence, health and transport.
Technology e.g. increased spending on computers in schools
Tax revenue ­ higher tax revenue = more money to spend to achieve objectives
Demographic changes ageing population pressure to increase spending
National Income(real GDP) ­ fall lead to increase in spending to stimulate economic activity
4. Net exports: The value of exports minus the value of imports (XM)

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Exchange rates
Income levels at home and abroad
Price and Quality of domestic and foreign products
Aggregate demand curve:
Shifts in AD:
Net exports
Interest rates
Aggregate Supply: the total output that producers in the economy are willing and able to
supply at each price level
Shifts in SRAS:
Cost of production
Raw material prices
Weather conditions
Producer taxes and subsidies
Change in inflation expectations
Supply side shocks (unexpected events)
e.g.…read more

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