Professional Documents
Culture Documents
Characteristics of Aggregate Demand
Characteristics of Aggregate Demand
demand?
AD = C+I+G+(X-
M)
GPL1
AD = C+I+G+(X-
M)
GPL1
GPL2
AD = C+I+G+(X-
M)
GPL2
AD = C+I+G+(X-
M)
GPL2
AD = C+I+G+(X-
M)
GPL2
AD = C+I+G+(X-
M)
Real income effect: As the price level falls, the real value of income rises, and
consumers can buy more of what they want or need – this is known as the real
money balance effect
Real income effect: As the price level falls, the real value of income rises, and
consumers can buy more of what they want or need – this is known as the real
money balance effect
Balance of trade effect: A fall in the relative price of level of Country X could make
foreign-produced goods and services more expensive, causing a rise in exports and a
fall in imports. Exports are an injection, imports a withdrawal.
Real income effect: As the price level falls, the real value of income rises, and
consumers can buy more of what they want or need – this is known as the real
money balance effect
Balance of trade effect: A fall in the relative price of level of Country X could make
foreign-produced goods and services more expensive, causing a rise in exports and a
fall in imports. Exports are an injection, imports a withdrawal.
Interest rate effect: If price inflation is low and this might lead to a reduction in
interest rates if the central bank has a given inflation target. Lower interest rates
means there is less incentive to save and a fall in interest rates may cause the
exchange rate to depreciate and improve exports.
GPL2
AD1
GPL1
GPL2
AD2
AD1
GPL1
GPL2
AD2
AD1
GPL2
AD2
AD1
GPL2
AD2
AD3 AD1
GPL2
AD2
AD3 AD1
A fall in interest rates on This means they have a Another effect of lower
a property mortgage higher effective interest rates is usually
means that home- disposable income to lower the cost of
buyers have less to pay which can be spent on servicing a credit card or
each month paying the goods and services. other types of
interest on a home loan. borrowing.
Explain how lower interest rates can increase aggregate demand
A fall in interest rates on This means they have a Another effect of lower
a property mortgage higher effective interest rates is usually
means that home- disposable income to lower the cost of
buyers have less to pay which can be spent on servicing a credit card or
each month paying the goods and services. other types of
interest on a home loan. borrowing.
A fall in interest rates on This means they have a Another effect of lower
a property mortgage higher effective interest rates is usually
means that home- disposable income to lower the cost of
buyers have less to pay which can be spent on servicing a credit card or
each month paying the goods and services. other types of
interest on a home loan. borrowing.
A fall in interest rates on This means they have a Another effect of lower
a property mortgage higher effective interest rates is usually
means that home- disposable income to lower the cost of
buyers have less to pay which can be spent on servicing a credit card or
each month paying the goods and services. other types of
interest on a home loan. borrowing.
Cheaper loans might Through these channels, And it also reduces the
also lead to a rise in lower interest rates can incentive to save,
planned capital be expected to lift especially if nominal
investment spending by consumer demand interest rates on savings
businesses which is also which is the largest are below the rate of
a component part of AD. component of AD. inflation.
Explain how a fall in state welfare
spending reduces AD
Household Benefit Cap