AS-level Macroeconomics Topic 1.2: Aggregate Demand (AD)

Aggregate demand is the total demand in the economy and it measures spending on goods and services by consumers, firms, the government and overseas consumers and firms.

Consumer spending is the largest component of aggregate demand, making up just over 60% of GDP.

A decrease in interest rates by the Monetary Policy Committee increases consumer spending by making borrowing cheaper, reducing the incentive to save, and increasing the effective disposable income of households.

Disposable income is the amount of income consumers have left over after taxes and social security charges have been removed, and it is what consumers can choose to spend.

Consumer income might come from wages, savings, pensions, benefits, and investments, such as dividend payments.

There are time lags between the change in interest rates and the rise in AD, so this is not suitable if a rise in AD is needed immediately.

When demand for exports is high, firms are more likely to invest because they expect higher sales, leading to increased investment in capital goods.

A decrease in interest rates increases investment as the cost of borrowing decreases, while high interest rates discourage investment and may lead to a decrease in consumer spending.

Access to credit is essential for investment, and a lack of access, as seen during the financial crisis, can limit investment opportunities; firms may need to rely on retained profits instead.

The availability of funds, dependent on consumer saving, determines the amount of funds available for lending and investment.

Lower corporation tax rates encourage investment as firms retain more profits, while higher tax rates may discourage investment.

Government spending, which accounts for 18-20% of GDP, can influence investment indirectly by creating demand for goods and services.

because no output is derived from them

it increases the government deficit

trade cycle or business cycle

because the economy does not need stimulating and fewer people will be claiming benefits

to influence the economy

public goods and merit goods

Exports will decrease as consumer spending in those economies will fall due to falling real incomes.

Protectionism reduces the trade deficit by reducing imports, but may also lead to a decrease in exports due to retaliation.

Competitiveness is influenced by supply-side policies, innovation, quality, niche markets, labour costs, productivity, and infrastructure.

A decline in real income reduces the demand for UK goods and services.

Protectionism may lead to a decrease in UK exports due to retaliation.

The value of UK exports is determined by the price elasticity of demand.

Fiscal policy is a demand-side policy that influences the level or composition of Aggregate Demand (AD). The UK's trade deficit reduces the value of AD, as exports minus imports results in a negative value.

During periods of economic growth, higher real incomes lead to increased spending, a larger deficit on the current account, and a wider trade deficit. Conversely, during economic decline, real incomes fall, and the current account improves.

A depreciation of the pound makes exports cheaper and imports more expensive, narrowing the current account trade deficit. However, this depends on which currency the pound depreciates against, and the demand for UK exports must be price elastic.

An increase in real income leads to a wider trade deficit, while a decrease in real income improves the trade balance and the current account.

A depreciation of the pound improves the trade balance and the current account, as exports become cheaper and imports more expensive. However, this depends on the specific currencies involved and the elasticity of demand for UK exports.

The main influences on the (net) trade balance are real income and exchange rates, which in turn affect the current account. Real income affects spending patterns, while exchange rates influence the competitiveness of UK exports.

Firms will be more likely to invest in capital goods.

It will discourage consumer spending.

Access to credit encourages investment, especially after a financial crisis.

More available funds lead to higher investment.

Lower corporation tax rates encourage investment.

18-20%

Consumer spending is likely to increase.

It reduces the cost of debt, such as mortgages.

It has no immediate effect on consumer spending.

Because it makes up just over 60% of GDP.

The level of disposable income.

It reduces the cost of debt, leading to increased spending.

To stimulate the economy and increase real output

An increase in the government deficit

Government spending is directly related to the trade cycle

To influence the economy

A decrease in the government deficit

Public goods and merit goods

It narrows the deficit

An increase in real income leads to a larger trade deficit

It increases the trade deficit

It has a significant impact

It increases imports and decreases exports

A depreciation of the pound improves the trade balance

Exports will decrease

It will decrease the trade deficit

A combination of factors, including innovation, quality, niche markets, labour costs, productivity, and infrastructure

It will decrease the demand for UK goods and services

It will decrease UK exports

The price and quantity of exports