A level-readyEconomics ยท WEC12 (Unit 2)
Aggregate demand
Aggregate demand (AD) is the total planned spending on an economy's goods and services at a given price level.
The components
AD = C + I + G + (X - M)
- C: consumption by households
- I: investment by firms in capital goods
- G: government spending
- X - M: exports minus imports (net exports)
Shifts in AD
AD shifts right if any component rises at each price level: lower interest rates (more C and I), higher consumer confidence, more government spending, a weaker currency raising exports. A change in the price level is a movement along AD, not a shift.
Why it slopes down
A higher price level reduces real wealth, makes exports less competitive and tends to raise interest rates, so planned spending falls.
Worked example
C = 600, I = 150, G = 200, X = 120, M = 170 ($bn). Find AD.
- AD = 600 + 150 + 200 + (120 - 170)
Answer: AD = $900 bn
Check yourself
- C = 500, I = 100, G = 150, X = 80, M = 90 ($bn). Find AD.
Show answer
$740 bn. 500 + 100 + 150 - 10 = $740 bn.
- In most economies, which component of AD is the largest?
- Consumption
- Investment
- Net exports
- Government spending
Show answer
Consumption. Household consumption is usually the largest share of spending.
- Which would shift AD to the right?
- A rise in income tax
- Lower consumer confidence
- A cut in interest rates
- A stronger currency reducing exports
Show answer
A cut in interest rates. Cheaper borrowing raises consumption and investment.
- In AD, 'investment' means
- buying shares
- spending by firms on capital goods
- putting money in a savings account
- government spending on schools
Show answer
spending by firms on capital goods. Economic investment is spending on capital such as machinery and buildings.
- A rise in the general price level causes
- a rightward shift of AD
- a leftward shift of AD
- no change in real output demanded
- a movement along the AD curve
Show answer
a movement along the AD curve. The price level is on the axis, so it moves along the curve.
Sources
Last updated 7 November 2026. Spotted a mistake? Email alevel@lifereadysociety.com.