2.2 Aggregate Demand

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By the end of this unit you should be able to:
  • Distinguish between the microeconomic concept of demand for a product and the macroeconomic concept of aggregate demand.
  • Construct an aggregate demand curve.
  • Explain why the AD curve has a negative slope.
  • Describe consumption, investment, government spending and net exports as the components of aggregate demand.
  • Explain how the AD curve can be shifted by changes in consumption due to factors including changes in consumer confidence, interest rates, wealth, personal income taxes (and hence
  • disposable income) and level of household indebtedness.
  • Explain how the AD curve can be shifted by changes in investment due to factors including interest
  • rates, business confidence, technology, business taxes and the level of corporate indebtedness.
  • Explain how the AD curve can be shifted by changes in government spending due to factors including political and economic priorities.
  • Explain how the AD curve can be shifted by changes in net exports due to factors including the income of trading partners, exchange rates and changes in the level of protectionism.

Imports, exports and exchange rates