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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When a component changes, the whole AD curve shifts.
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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.
In the exam you draw AD/AS with letters, not numbers: PL1 and Y1 where AD meets SRAS, PL2 and Y2 after the shift.
Draw it like this in the exam
- Axes: Average price level up the side, Real GDP along the bottom. No numbers and no title.
- Curves labelled at their ends: AD1, AD2 and SRAS.
- A dot where the curves cross, with dashed lines to both axes: PL1, PL2, Y1 and Y2.
- An arrow to show which way the curve shifts.
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Paper 1 asked this in November 2025, as part (a) for 10 marks.
Explain two determinants of consumption that may cause it to decrease.
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How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |