IB Economics Topic 3.2.4 Shifts of the AD Curve…

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IB Economics Topic 3.2.4 Shifts of the AD Curve… | RevisionDojo

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Shifts of the Aggregate Demand Curve

The aggregate demand (AD) curve shows the total spending on goods and services in an economy at different price levels.
When the determinants of AD change, the curve shifts, reflecting an increase or decrease in overall economic activity.

Note

Movements along the AD curveoccur due to changes in the price level, while shiftsare caused by changes in the determinants of AD.

Determinants of Aggregate Demand

The components of aggregate demand are:

Consumption (C)
Investment (I)
Government Spending (G)
Net Exports (X - M)

Note

Any change in these components will cause the AD curve to shift.

Consumption (C)

Consumption is the total spending by households on goods and services. Factors affecting consumption include:

1. Consumer Confidence

When consumers feel optimistic about the economy, they spend more, shifting AD to the right.
Conversely, pessimism leads to reduced spending, shifting AD to the left.

Example

During a recession, rising unemployment may cause consumers to cut back on spending, shifting the AD curve leftward.

2. Interest Rates

Higher interest rates increase the cost of borrowing and encourage saving, reducing consumption and shifting AD leftward.
Lower interest rates make borrowing cheaper and saving less attractive, increasing consumption and shifting AD rightward.

Tip

Interest rates affect both consumption and investment, making them a critical determinant of AD.

3. Wealth

An increase in household wealth (e.g., rising property or stock values) boosts consumption, shifting AD to the right.
A decrease in wealth has the opposite effect, shifting AD to the left.

Example

A booming housing market can increase household wealth, leading to higher consumer spending and a rightward shift in AD.

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IB Economics 3.2.4 Shifts of the AD Curve Caused by Changes in Determinants Notes

Shifts of the Aggregate Demand Curve

Determinants of Aggregate Demand

Consumption (C)

1. Consumer Confidence

2. Interest Rates

3. Wealth

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Shifts of the Aggregate Demand Curve

Determinants of Aggregate Demand

Consumption (C)

1. Consumer Confidence

2. Interest Rates

3. Wealth

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1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 3.2.4 Shifts of the AD Curve Caused by Changes in Determinants Notes

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

Shifts of the Aggregate Demand Curve

Determinants of Aggregate Demand

Consumption (C)

1. Consumer Confidence

2. Interest Rates

3. Wealth

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Shifts of the Aggregate Demand Curve

Determinants of Aggregate Demand

Consumption (C)

1. Consumer Confidence

2. Interest Rates

3. Wealth

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Duis aute irure dolor in reprehenderit

Excepteur sint occaecat cupidatat non proident

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