AD and AS and their interaction. Summary

Aggregate demand – total demand for a country’s goods and services at a given price level and in a given time period
AD = C + I + G + X – M
Components of AD:
CONSUMER EXPENDITURE. Influences of consumer expenditure:
• Real disposable income
• Wealth
• Consumer confidence and expectations
• The rate of interest
• The age structure of population
• Distribution of income
• Inflation
SAVING. Influences:
• Real disposable income
• The rate of interest
• Confidence and expectations
• Saving schemes
• Range of financial institutions
• Government policies
• The age structure of population
INVESTMENT. Influences:
• Changes if real disposable income
• Expectations
• Capacity utilization
• Current Profit levels
• Corporation tax
• The rate of interest
• Advances in technology
• Price of capital equipment
GOVERNMENT SPENDING. Influences:
• Extent of market failure an ability to correct it
• The level of economic activity
• A desire to please the electorate
• Rising crime
NET EXPORTS (exports – Imports) Influences:
• Real disposable income abroad
• Real disposable income at home
• The domestic price level
• The exchange rate
• Government restrictions on free trade
Aggregate Supply – the total amount that producers in an economy are willing and able to supply at a given price level in a given time period.
 Causes of change in AS:
-In short run: change in the cost of production
-In long run: change in the quality and quantity of resources
The circular flow of income
The movement of spending and income throughout the economy.
Additional forms of spending:
1)Leakages ( Taxes, Saving, Imports ) which reduce AD
2) Injections ( Investment, Government Spending, Exports) aimed to increase AD
Multiplier Effect
When people spend money, this expenditure becomes the income for others. Others will also spend some of their income. So there is a knock – on effect with AD rising by more than the initial amount