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AD, SRAS & LRAS | A-Level Economics

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Aggregate demand

Aggregate demand is the total planned spending on goods and services produced in the UK economy.

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

  • C (consumer spending)
    • multiplier effect
    • consumer confidence
    • disposable incomes
    • interest rates
  • I (spending by firms on capital goods)
    • interest rates
    • business confidence - accelerator effect
  • G (government spending)
    • state of the economy
  • X-M (net exports)
    • competitiveness
      • exchange rates
      • productivity

Short-run aggregate supply

SRAS: total planned output at each price level

  • costs of production
    • raw material prices
    • exchange rates
    • wage rates
    • productivity

Long-run aggregate supply

LRAS: production potential of the economy

  • market based
    • cut income tax
    • cut corporation tax
    • cut unemployment benefits
  • interventionist
    • increase spending on education and training
    • increase spending on infrastructure