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Aggregate Demand and Supply


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Aggregate demand (AD)
A measure of total demand in an economy consisting of consumption, investment, government spending, and net exports
Consumption (C)
Spending by households on goods and services (approximately 63% of AD)
Investment (I)
Spending by firms on new machinery and buildings (capital) - about 15% of AD.
Government spending (G)
Spending by the government (about 24% of GDP)
Net exports (X-M)
A measure of the difference between the value of imports and the value of exports
Exports
Good and services sold by UK firms to other countries
Imports
Goods and services bought by UK firms and households from other countries
Real Output (real GDP)
A measure of all the goods and services produced in an economy in a given timer period, normally a year. Real means it has been adjusted to exclude the effect of inflation on the value of GDP.
Average Price Level
An average of the prices of all goods and services in an economy. An increase in the average price level is inflation.
Aggregate Supply
The total output firms are willing to produce at different price levels.
Supply-side shock
A significant impact on many firms' costs caused by a sudden increase in costs (e.g. an oil price hike)
Deflationary gap
When equilibrium real output (Y)is less than full employment real output (Yf) (also known as a negative output gap)
Inflationary gap
When equilibrium real output (Y) is greater than full employment real output (yf), causing inflationary pressures (also known as a positive output gap).