Aggregate Demand Flashcards
1
Q
What is Aggregate Demand?
A
AD is the total demand for goods and services at a given price level, in a given time period.
2
Q
What is the Aggregate Demand equation?
A
AD= Consumption + Investment + Gov Spending + Net Exports
3
Q
Why does changes in price level influence AD?
A
Wealth effect. As price level decreases, the purchasing power increases. Consumption will therefore increase.
Trade effect. As price level decreases, exports are more competitive and so net exports increase.
Interest effect. As price level decreases, interest rates can be kept low as BOE wants to be in line with inflation target. Low IR boosts the economy. Increasing I, (X-M), C
