Aggregate Demand/Supply Notes
AGGREGATE DEMAND
- the total spending on goods and services in a period of time at a given price level
C + I + G + (X – M)
C = Consumption
o The total spending by consumers on domestic goods and services ▪ Durable goods: used by consumers over a period of time (i.e. cars, computers, mobile phones) ▪ Non – durable goods: used up immediately or over a short time span (i.e. rice, toilet paper, newspapers) o Causes of change in consumption ▪ Changes in income – Income rises, people have more money to spend on goods and services, therefore consumption rises • Increase in consumption leads to increase in aggregate demand. In countries with a growing economy, consumption and therefore aggregate demand will rise. ▪ Changes in interest rates – Spending on durable goods usually comes from money borrowed from the bank. Increase in interest rate leads to decrease in borrowing of money, as it is more expensive to borrow. • Increase in interest rates leads to decrease in consumption and therefore decrease in aggregate demand • High interest rates encourage consumers to save money rather than spend it, therefore consumption decreases. ▪ Changes in wealth – The amount of consumption depends on amount of wealth that consumers have (income ≠ wealth) o Income = money that people earn o Wealth = assets that people own • Change in house prices – House prices increase, consumers feel wealthy/confident and therefore increase consumption by saving less and borrowing more • Change in the value of stocks and shares – Many consumers hold shares in companies. If value of shares increases, people feel wealthy and therefore spend more. Or they sell shares and use money to increase consumption ▪ Changes in expectations/consumer confidence – If people are optimistic, they will spend more. High consumer confidence will lead to increased consumption. ▪ Household indebtedness – The extent to which
- the total spending on goods and services in a period of time at a given price level
C + I + G + (X – M)
C = Consumption
o The total spending by consumers on domestic goods and services ▪ Durable goods: used by consumers over a period of time (i.e. cars, computers, mobile phones) ▪ Non – durable goods: used up immediately or over a short time span (i.e. rice, toilet paper, newspapers) o Causes of change in consumption ▪ Changes in income – Income rises, people have more money to spend on goods and services, therefore consumption rises • Increase in consumption leads to increase in aggregate demand. In countries with a growing economy, consumption and therefore aggregate demand will rise. ▪ Changes in interest rates – Spending on durable goods usually comes from money borrowed from the bank. Increase in interest rate leads to decrease in borrowing of money, as it is more expensive to borrow. • Increase in interest rates leads to decrease in consumption and therefore decrease in aggregate demand • High interest rates encourage consumers to save money rather than spend it, therefore consumption decreases. ▪ Changes in wealth – The amount of consumption depends on amount of wealth that consumers have (income ≠ wealth) o Income = money that people earn o Wealth = assets that people own • Change in house prices – House prices increase, consumers feel wealthy/confident and therefore increase consumption by saving less and borrowing more • Change in the value of stocks and shares – Many consumers hold shares in companies. If value of shares increases, people feel wealthy and therefore spend more. Or they sell shares and use money to increase consumption ▪ Changes in expectations/consumer confidence – If people are optimistic, they will spend more. High consumer confidence will lead to increased consumption. ▪ Household indebtedness – The extent to which