1. Aggregate demand and the level of economic activity

2. Learning outcomes
To be able to distinguish between inward and outward shifts of the aggregate demand curve
Understand the link between aggregate demand and economic activity

3. Combining the components of AD
Imagine a series of individual demand curves for the following:-
These are combined to produce the AD curve where AD = C+I+G+(X-M) C I G X
shoes
Capital equipment
Schools
Cars
Mobile phones
machinery
Hospitals
Whiskey
apples
premises
Roads
Cashmere wool
fuel
Training
Grants
Financial services
Insurance
R&D
Unemp. benefit
Plant and machinery
Price level AD
Real output

4. Shifts in the aggregate demand curve (positive/outward)
Changes in the components of AD will shift the AD curve
Positive changes will shift the AD curve outwards
C- An increase in the population or an increase in national income (lower taxes)
I - Where firms invest into capital equipment, machinery and premises
G – An increase in government spending ( benefits, schools, roads, etc)
X – An increase in exports
Price level
AD2
AD1
Real output

5. Shifts in the aggregate demand curve (negative/inward)
Changes in the components of AD will shift the AD curve
Negative changes will shift the AD curve inwards C-
I -
G –
M -
Price level
AD1
AD2
Real output

6. The multiplier & accelerator principle
Current investment plans based on previous changes to GDP.
As GDP rises future plans incorporate this change.
Last year GDP rose by 2%, businesses intend on increasing investment by 2.1% expecting the economy to grow in the forthcoming year.
Multiplier
How a change in injections (I, G, X) can have a disproportionate effect on GDP. That is a £1m injection can increase GDP by more than £1m.
This is increase impacts upon future business plans accelerating investment.
This injection has a multiplier effect on GDP.