Aggregate demand (AD) is the total spending on a country's goods and services at each price level.
AD = C + I + G + (X − M)
Consumption (C)
Households buying food, phones, holidays: the biggest part.
Investment (I)
Firms buying machines, buildings, technology.
Government spending (G)
Schools, hospitals, roads, public-sector wages.
Net exports (X − M)
Sales abroad minus spending on imports.
The points to remember
- AD slopes down: at a lower price level, real wealth is higher, interest rates tend to be lower and exports cheaper, so more is bought.
- A change in the price level moves along AD; a change in C, I, G or X − M shifts it.
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Any change in C, I, G or X − M shifts the whole AD curve.
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Remember it as: More spending: AD right. Less spending: AD left.
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Paper 1 asks for the determinants behind each component.
What shifts AD
| Component | What makes it change |
|---|---|
| Consumption (C) | Consumer confidence, interest rates, wealth, income taxes, household debt, expected prices |
| Investment (I) | Business confidence, interest rates, technology, business taxes, company debt |
| Government spending (G) | Political and economic priorities |
| Net exports (X − M) | Trading partners' incomes, the exchange rate, trade policies |
The chain to write: Name the determinant, the component it changes, then the AD shift and what happens to real GDP and the price level.
Quick reminder
- Axes: Average price level up the side, Real GDP along the bottom
- Curves: AD1, AD2 and SRAS
- Marks: PL1, PL2, Y1 and Y2
- Dots with dashed lines to the axes, an arrow for the shift
- No numbers, no title
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Paper 2 asked this in November 2022, for 4 marks.
Using an AD/AS diagram, explain how falling remittances may affect the country's real output.
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How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | A correct diagram and a correct explanation |
| 1–2 | A correct diagram or a correct explanation, not both |
| 3 at most | A diagram with a wrong or missing label |