Discuss how changes on aggregate demand influence price levels, output levels and employment.
The meaning of “aggregate” is added together. All of the elements introduced in microeconomics are totaled in macroeconomics. Aggregate demand and supply analysis brings together the amount that consumers wish to consume and firms wish to produce at any price levels. Aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level. Also it is the amount of goods and services that will be purchased at all possible price levels in the economy. This is called the demand for the Gross Domestic Product of a country when inventory levels are static. The formula for aggregate demand is AD= C + I + G + (X-M); C – Consumption, I – Investment, G – Government Spending, X – Exports, M – Imports.
The AD curve is downward sloping but it’s not because people buy more when things are cheaper. There are three ways to explain the downward sloping of the AD curve: *
Lower prices in an economy mean international competitiveness, so there are more exports and fewer imports. In other words, net exports are higher at lower prices. *
The total amount of spending will be approximately equal to weather prices are low or high people have almost the same amount of money to spend, so the area under the curve is fairly constant. This is known as the real balance effect. *
At higher price levels, interest rates are likely to be rising by the monetary authorities. This means that investment, a component of aggregate demand, will fall and saving might increase.
There are three main components of aggregate demand:
* The Price Level and Consumption: The Wealth Effect
A decrease in the price level makes consumers feel wealthier, which in turn encourages them to spend more. This increase in consumer spending means larger quantities of goods and services demanded. When consumers...
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