Aggregate Demand

Aggregate Demand: The total amount of spending on goods and services in a period of time at a given price level  a change in price level will result in a movement along the AD curve; a change in any other components of aggregate demand will cause the AD curve to shift

Consumption (C): The total spending by consumers on domestic goods and services  we look at two different categories of goods, durable goods and non-durable goods

What causes changes in consumption:

  1. Changes in income: The most significant determinant of consumption; as income rises, people have more money to spend, so consumption naturally rises
  2. Changes in interest rates: If there is an increase in interest rates, then there is likely to be less borrowing, and therefore less consumption  people would rather put money in banks to earn money rather than spend it
  3. Changes in wealth: Wealth is the assets that people own  if house prices or stock market prices go up, people might feel more confident and therefore increase consumption
  4. Changes in expectations/Consumer confidence: If people are optimistic about their economic future then they are likely to spend more money  measured by “consumer confidence index”
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Investment (I): The addition of capital stock to the economy, investment is carried out by firms; it includes all goods that are made by people and are used to produce other goods or services such as factories, machines, offices, or computers  there are two types of investment:

  1. Replacement Investment: When a firm spend on capital in order to maintain the productivity of their existing capital
  2. Induced Investment: When firms spend on capital to increase the output to respond to higher demand in the economy

What causes change in investment:

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