Aggregate Demand (AD)

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Revision presentation on aggregate demand - designed for unit2 AS macro students. AF=C+I+G+X-M

Revision presentation on aggregate demand - designed for unit2 AS macro students. AF=C+I+G+X-M

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  • 1. Aggregate Demand
  • 2. 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
  • 3. Key concepts • Aggregate demand (AD) – 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 (X-M) – The net trade balance – Trade surplus (X>M) – a net injection of demand – Trade deficit (X<M) – a net leakage of demand • Government spending (G) – Expenditure by central and local government on goods and services (not including welfare benefits)
  • 4. Understanding Aggregate Demand • 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)
  • 5. Components of aggregate demand Consumer spending is the biggest single component of aggregate demand
  • 6. The UK Economic Cycle Changes in the level of aggregate demand are key to understanding short term changes in a country’s economic cycle
  • 7. The Aggregate Demand Curve Price Level P2 Contraction along AD curve P1 AD1 Y2 Y1 Real National Output
  • 8. The Aggregate Demand Curve Price Level P2 P1 Expansion along AD curve P3 AD1 Y2 Y1 Y3 Real National Output
  • 9. Outward Shift in AD Price Level Outward shift of AD curve P1 AD2 AD1 Y1 Y2 RNO
  • 10. Inward Shift in Aggregate Demand Price Level Inward shift of AD curve P1 AD3 AD4 Y4 Y3 Real National Output
  • 11. Some Causes of Changes in AD Monetary Policy • Higher or lower interest rates • Change in supply of money • Change in a country’s exchange rate Fiscal Policy • Changes in direct / indirect taxes • Changes in government spending • Changes in government borrowing Business and Consumer confidence • Planned investment spending • Consumer confidence and retail spending
  • 12. UK Policy Interest Rates Falling interest rates – which in theory ought to bring about an increase in aggregate demand
  • 13. Sterling against the US dollar ($) A depreciation in the value of the £ v the US $ Sterling has been stable against the $ since 2010
  • 14. Some Causes of Changes in AD Monetary Policy • Higher or lower interest rates • Change in supply of money • Change in a country’s exchange rate Fiscal Policy • Changes in direct / indirect taxes • Changes in government spending • Changes in government borrowing Business and Consumer confidence • Planned investment spending • Consumer confidence and retail spending
  • 15. UK Government Spending and Taxation The Coalition Government has introduced a period of fiscal austerity – including deep cuts in government spending
  • 16. Some Causes of Changes in AD Monetary Policy • Higher or lower interest rates • Change in supply of money • Change in a country’s exchange rate Fiscal Policy • Changes in direct / indirect taxes • Changes in government spending • Changes in government borrowing Business and Consumer confidence • Planned investment spending • Consumer confidence and retail spending
  • 17. Business Confidence Affects Investment Capital spending collapsed during the recession and has struggled to recover since
  • 18. Consumer sentiment is important for AD A change in sentiment is also a change in “animal spirits”
  • 19. Changes in unemployment directly affect AD The unemployment rate is measured as a percentage of the labour force
  • 20. Changes in savings drive household spending Disposable income can be spent or saved. A rise in savings brings about a contraction in consumption
  • 21. External Factors and Aggregate Demand Aggregate demand is also affected by macroeconomic events and policies in other countries - these might have a direct effect on the value of exports and imports, or the rate of inflation or the exchange rate
  • 22. External Factors and Aggregate Demand Aggregate demand is also affected by macroeconomic events and policies in other countries - these might have a direct effect on the value of exports and imports, or the rate of inflation or the exchange rate EU economy US Economy Emerging Markets
  • 23. European Union The European Union is the UK’s biggest trade partner accounting for over 55% of total exports and imports
  • 24. The economic cycle for the USA How might stronger economic growth in the USA economy affect AD in the UK?
  • 25. China Economy GDP growth in the Chinese economy is slowing down – consider what this might mean for the UK
  • 26. Test Yourself on Aggregate Demand!
  • 27. Tutor2u Economics Keep up-to-date with economics, resources, quizzes and worksheets for your economics course.