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The AD curve is downward sloping. It shows the relationship between the price level and equilibrium output in the economy. A movement along the AD curve shows how equilibrium income will change if there is a change in the price level.
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The AD curve is downward sloping. It shows the relationship between the price level and equilibrium output in the economy. • A movement along the AD curve shows how equilibrium income will change if there is a change in the price level. • A shift in the AD curve is caused by a change in variables such as consumption and export at any given price level. • The multiplier increases any impact on aggregate demand and national income of changes in an injection to the circular flow.
Shifts in the AD curve • Shift in the AD curve will occur if there is a change in any other variable apart from the price level • Consumption • A change in the willingness of consumers to spend can shift the AD curve. • Monetary variables: • 1. A change in the level of unemployment. • 2. A reduction in interest rate • 3. A substantial rise in stock market prices will increase consumer wealth • A change in the age composition of household. The more young and old the household, the greater will tend to be the level of consumption.
Shifts in the AD curve • New technology which creates new consumer product can lead to an increase in consumer spending • A fall in income tax will increase consumer disposable income, leading to increase in consumer spending. • Investment • 1. An increase in business confidence • 2. A fall in interest rate ordered by the government would lead to a rise in investment • 3. An increase in company profitability would give firms more retain profit to use in investment • 4. A fall in tax on profit would lead to the rate of return on investment project rising, leading to a rise in investment
Shifts in the AD curve • Government spending • 1. A rise in government spending with no change in taxation will lead to a fall in its budget surplus or a rise in budget deficit. • 2. A fall in government spending with no change in taxation will lead to a shift to the left in the AD curve. • 3. Government spending in aggregate demand does not include payment by the government for which there is no corresponding output (transfer payment). • 4. Government spending is influence by political decisions of the government of the day.
Shifts in the AD curve • Export and import • 1. Arise in the exchange rate is likely to lead to lower export, vice vasa. • 2. An improvement in innovation and quality of manufactured goods is likely to lead to a rise in export.
The AD curve shows the relationship between the price level and the level of real expenditure in the economy. • The price level is the average level of prices in the economy. • Real output equals real expenditure and real income. • Aggregate demand falls as prices rise, first, because increase in interest rate reduces consumption and investment and , second, because a loss of international competitiveness at the new higher prices will reduce exports and increase imports.
What happens to the different components of expenditure when prices rise? • Consumption spending is influenced by a rise in interest rate and also by the wealth effect • Investment is affected by changes in in the rate of interest. The higher the rate of interest the less profitable new investment projects become. • Government spending in aggregate demand does not include payment by the government for which there is no corresponding output.(transfer payment). Government spending is influence by political decisions of the government of the day. • A higher price level in the UK means that foreign firms will be able o compete more successfully in the UK economy.
