Macroeconomics: Aggregate Demand (Aims of Macroeconomics Policy: (To…
Macroeconomics: Aggregate Demand
Total level of planned real expenditure on the goods and services produced within a country.
C + I + G + X - M
X = Exports of goods and services. Goods leave the country but money from abroad flows in to our economy
M = Imports of goods and services. Goods enter the economy however money leaves
G = Government spending
I = Gross capital investment
C = Consumer expenditure on goods and services
Causes of Shifts in Aggregate Demand:
Fall in AD
Cut in government spending
Higher interest rates
Fall in exports
Decline in household wealth
Increase in AD
Depreciation of the exchange rate
Cuts in direct and indirect taxes
Increase in house prices
Expansion of supply of credit + lower interest rates
The capacity of the economy to produce more goods + services over time
Aggregate Demand Curve:
Balance of trade:
A persistent rise in the price of level of Country X could make foreign-produced goods and services cheaper, causing a fall in exports and a rise in imports
Interest rate effect:
If the price level rises, this causes inflation and an increase in demand for money and a possible rise in interest rates on loans which then has a deflationary effect on consumer and business demand.
Falling real incomes:
As the price level rises, the real value of income falls and consumers are less able to buy what they want or need - this is known as the real balance effect.
Aims of Macroeconomics Policy:
To minimise unemployment
To generate economic growth
To control inflation
To achieve a satisfactory balance of payments position
Instruments of Macroeconomic Policy
Monetary policy: Interest rates, money supply and the exchange rate.
Supply-side policies: Cuts in direct taxes, privatisation, training, investment incentives.
Fiscal policy: Government spending, taxation and the budget balance
Changes in aggregate demand affects the performance of the economy. for example an increase in spending will encourage firms to produce more, increasing output and employment, but too much demand may lead to inflation.
Total value of goods + services produced in the economy