The role of AD in influencing the level of economic activity
Aggregate demand (AD) is the total spending on goods and services in an economy. When AD rises or falls, it directly changes how much the economy produces, how many people have jobs, and the general price level.
Formula
AD = C + I + G + (X − M)
Real World
During the UK's 2020 COVID lockdowns, consumer spending (C) and business investment (I) collapsed, dragging AD sharply downward — the economy contracted by 9.9%, the largest annual fall on record.
Exam Focus
For 'analyse' or 'evaluate' questions, always trace the AD shift through to effects on real GDP, price level, and employment — stopping at 'AD rises' earns no analysis marks.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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