Aggregate Demand

1 The characteristics of AD

a) The concept of AD.

b) Components of aggregate demand:

• C + I + G + (X−M) = AD

• the AD curve.

c) The distinction between a movement along, and a shift of, the AD curve.

 

2 Consumption (C) a) Influences on consumption:

• disposable income •

interest rates

• consumer confidence

• level of welfare payments

• wealth effects

• availability of credit.

b) The relationship between savings and consumption.

c) The definition of the ‘savings ratio’.

d) Causes and effects of changes in the savings ratio.

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3 Investment (I)

a) The distinction between gross investment and net investment.

b) Influences on investment:

• the rate of economic growth

• interest rates

• business confidence and expectations

• availability of credit

• tax on company profits.

c) Government policy to promote investment:

• tax relief • subsidies • reductions on the rate of corporation tax.

 

4 Government expenditure (G)

a) Influences on government expenditure:

• fiscal policy • the level of economic activity • correction of market failures • political priorities.

 

5 Net trade balance (X−M)

a) The impact on the net trade balance of changes in:

• real income • the exchange rate • the state of the global economy • degree of protectionism • non-price factors.