Y12 Macroeconomics Notes

Aggregate Demand | Notes

03 Dec 2025 • 1 min read

Aggregate demand is the total planned spending on goods and services in the economy at each price level.

AD = C + I + G + (X-M)

consumer spending
- real incomes
- consumer confidence
- interest rates
business spending on capital goods
- business confidence (accelerator theory)
- interest rates
government spending
- state of the economy
- the budget
net exports
- exchange rates
- raw material prices
- competitiveness

The accelerator effect happens when an increase in national income (GDP) results in a proportionately larger rise in capital investment spending.

When an increase in aggregate demand leads to a further increase in aggregate demand.

for example, if the government reduce income taxes
people would see an increase in real incomes
this would lead to an increase in consumer spending
businesses would expect to increase their output
therefore businesses might increase their spending on capital goods and employ more staff
this would lead to a further increase in AD

k = 1/(1-MPC)

If someone receives an extra £1 of income, MPC is the proportion that would be spent.

Marginal propensity to consume + marginal propensity to withdraw = 1

Withdrawals in the circular flow of income: imports, taxes, savings.