Aggregate Demand

“The total demand for final

goods and services in an
economy”
 AD = C+I+G+(X-M)

C= consumer’s expenditure on goods

and services.
I= Capital investment
G= Government spending
X= Exports of goods and services
M= imports of goods and services
(X-M)= Net exports
Demand shocks
• Events such as changes in interest rates in
the US will affect the UK, as 15% of our
exports go to the USA.
• Capital investment boom
• Change in exchange rate
• Consumer boom in one of our major trading
partners countries
• Boom in housing market or slump in share
prices
• Unexpected change in interest rates
Aggregate demand curve
Why AD curve slopes
downwards
Inverse relationship between
aggregate demand and the
economy.
• Falling real incomes
• Balance of trade
• Interest rate effect
Shifts in the AD curve
Causes of AD shifts

• Changes in expectations
• Changes in monetary policy
• Changes in fiscal policy
• Economic events in the international
economy.
• Changes in household wealth