Aggregate demand is the total planned expenditure in an economy at a given price level. It is composed of consumption (C), investment (I), government spending (G), and net exports (X-M). Each component is influenced by various economic factors - consumption depends on disposable income and credit availability, investment depends on interest rates and profit levels, government spending depends on public opinion and the state of the economy, and net exports depend on domestic and foreign income and exchange rates. Changes in any component will cause the aggregate demand curve to shift right for an increase or left for a decrease on a graph with real output on the x-axis and price level on the y-axis.

1. Aggregate Demand

2. Components
The sum of all total planned expenditure in an economy
at a general given price level per period
• C = Consumption
• I = Investment
• G = Government Spending
• X-M = Net Exports

3. Consumption
• This is spending by households on good and
services to meet its wants.
• E.g. Food and Clothes or TV Service
• Influences
– Disposable Income, the more consumers have
typically the higher AD
– Distribution of Income, an even distribution causes a
greater rise in AD
– Availability of Credit, is credit is cheap then AD
rises, if not AD falls

4. Investment
• Spending by Businesses on capital goods e.g.
Factories.
• Influences
– Changes in income, as incomes rise, people demand
more so businesses invest to cope with demand
– Rate of Interest, a lower rate will stimulate
investment as the cost of borrowing is low
– Profit Level, if profits are expected to be high
– Government Policy, lower corporation tax etc

5. Government Spending
• Spending by Government
• Main areas are Social Security, Health,
Education and Defence
• Influences
– Public Opinion
– State of the Economy
– Market Failures

6. Net Exports
• This is total exports (X) minus total imports (M)
• Influences on Net Exports
– Domestic Income, if incomes are high we tend to
suck in imports, which lowers AD
– Foreign Income, if incomes in other countries rise,
they will suck in British Exports
– Exchange Rates if the currency is weak against
another then it will encourage exports

7. AD on Graphs
Notes on the Graph
• X Axis is Real Output
• Y Axis is Price Level
• A movement along the D curve will be caused by a movement of the AS
curve

8. Shifts of the Curve
• If any component changes AD it will cause a shift.
• Should the change be an increase the curve shifts
to the right, if it is a decrease it shifts to the left