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Aggregate Demand

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Aggregate Demand

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    1. Aggregate Demand AD = C + I + G + (X M)

    2. Aggregate demand Aggregate demand means the total demand in an economy. So it is not just the demand for apples, mortgages or DVDs but the demand for everything.

    3. Aggregate demand curve, like the demand curve for any individual product, is a negatively shaped curve

    4. Why is it shaped like this It means when there is a high price level in the economy, the aggregate demand will be low. Periods of high inflation lead to a reduction in the aggregate demand. Why do you think this is so?

    5. Inflation = lower aggregate demand. Consumption is lower because of higher interest rates and the wealth effect. Investment is lower also because of higher interest rates and, it could be argued, the higher cost of hiring labour. Government spending is a political decision and we cannot know whether G will be higher or lower in times of high inflation. Exports will be more difficult to sell and imports will become cheaper.

    6. The multiplier effect The multiplier effect states that an increase in a component of aggregate demand say investment of 100m leads to a greater than 100m pound shift in aggregate demand. The 100m effectively multiplies around the economy. JM Keynes

    7. Multiplier effect

    8. The size of the multiplier. If 1 million is invested in the British economy, what will the overall effect be?

    9. The size of the multiplier. The multiplier is going to be somewhere between 1 and infinity. That is pretty vague, but you are not expected to be more precise than that.

    10. The size of the multiplier. The size of the multiplier depends on leakages in the economy. So the British government invest 1 million.

    11. The size of the multiplier. If the leakages are big the multiplier will be small.

    12. Fiscal Policy Government controls G. When the government increases its spending or reduces its tax, it is said to be using fiscal policy to influence aggregate demand.

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