Page 111 - F1 - AB Integrated Workbook STUDENT 2018-19

External analysis – economic factors

Key symbols

 C = Consumption: goods produced and sold to consumers

 I = Investment: production of, or expenditure on, non-consumption goods.
Carried out by firms.

 G = Government expenditure

 X = Exports

 M = Imports

AD is inversely related to prices since a price fall would raise everyone’s real wealth
and thus tend to raise spending

AD may shift if any one component (e.g. investment or exports) changes

Thus the AD curve slopes down from left to right but may shift.

8.3 Movements in aggregate demand (AD)

 If demand increases from AD 1 to AD 2, then this should give significant growth
(Y 1 to Y 2) – with reduced unemployment – but without significant increases in
inflation (P 1 to P 2)

 However, attempts to move AD from AD 3 to AD 4 will result in a smaller impact
on unemployment and output (Y 3 to Y 4) but a much larger increase in inflation
(P 3 to P 4)

 The impact of moving AD thus depends on where you are on the AS curve

105