Aggregate demand (AD)
Total planned spending in the economy at each average price level.
Characteristics of aggregate demand
Key definitions
AD formula
C + I + G + (X − M).
Real balance effect
Lower price level raises real wealth → more consumption.
Interest rate effect
Lower PL → lower interest rates → more I and C.
Net export effect
Lower PL → exports more competitive, imports less attractive.
Movement along AD
Caused by a change in the average price level.
Shift of AD
Caused by change in C, I, G, X or M at each price level.
Bank rate
Interest rate set by the Bank of England for lending to banks.
Autonomous spending
Spending not determined by current income.
Open economy AD
Includes net trade component.
Key concepts
AD is downward sloping for three reasons — know all three for analysis marks.
UK AD is consumption-heavy (~60%+ of GDP).
Relevant tips
- Diagram backlog: AD curve — label axes Price Level and Real GDP.
- Link shifts to policy (fiscal/monetary).
Examples & case studies
- Diagram: AD curve downward sloping.