Components of aggregate demand and its benefits.

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Karolina Duda 2F

Explain the components of AD (aggregate demand) and evaluate the extent to which an increase in AD is beneficial for the economy.

Aggregate demand is the total demand for goods and services in the economy at a given price level during a specific time period. An aggregate demand curve is the sum of individual demand curves as it shows how much all consumers, business and government are willing to spend on goods and services at given price levels and it outlines the relationship between income or output and the price level. Aggregate demand curve is downward sloping (higher the price, lower the demand). There are four major components of aggregate demand: consumption (C), investment (I), government expenditure (G) and net exports (NX), which is the imports and exports balance (X-M). According to this, the equation for aggregate demand is: AD = C + I + G + NX. Factors forming AD:

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** CONSUMPTION is the demand by households and unattached individuals for durables and non-durable goods. It is expressed as function of disposable income (amount of money left to consumers after taxes are paid), which is income – taxes (Y-T). It is because only that amount of money can be spent on goods.

** INVESTMENTS is the demand by business firms and some individuals, for new factories, machinery, computer software, education, housing, other structures and inventories. Investment is positively related to output (the higher the output, the more money for investitions) and negatively related to interest rates (the higher the interest rates the ...

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This essay is structured well, explaining the key terms and showing knowledge before analysing the changes in aggregate demand. Spelling, language and punctuation are strong throughout.

The analysis in this essay is strong. The components of aggregate demand are explained, and I liked how they discussed the factors determining each component. It would've been nice to have seen some discussion of the multiplier effect, in which an increase in one component will result in a larger increase in aggregate demand. I was particularly pleased to show the appreciation of Keynesian and Classical approaches, and displaying such skills will gain credit. I would note that Keynesian is the preferred curve by exam boards, and drawing the Classical curve limits your analysis and evaluation. I presume that the diagrams have not transferred over, as they have analysed them in the following paragraph. I liked how they analysed the diagram rather than simply placing it in their essay, this is evident by mentioning changes from AD1 to AD2 and P1, etc. There is a lack in analysis though in terms of consequences beyond the price level and GDP from the diagrammatical analysis. They needed to mention employment increases, welfare increases or possibly development. The evaluation is slightly poor - there is mention of government intervention only in the conclusion. I would've liked this point to have been expanded, explaining why different levels of government intervention would have different consequences.

This question engages well with the first part of the question, explaining the components of aggregate demand. However, there is no clear discussion of the extent to which an increase in aggregate demand will be beneficial. I would note that is vital to stay on focus and answer the whole question, as a lot of the marks in Economics are for evaluation. This can be simply done by saying "it depends upon what stage of the aggregate demand curve the macroeconomic equilibrium is currently at", but of course it needs to be in more depth to gain higher marks.