3.2.2—Determinants of aggregate demand
- Syllabus
- First assessment 2022
- Objective
- 3.2.2
- Level
- SL
A determinant shifts AD through a spending component
A non-price determinant shifts AD only by changing one of its spending components.
Consumption responds to confidence, interest rates, wealth, taxes, household debt and expected prices; investment responds to rates, business confidence, technology, business taxes and corporate debt; government spending follows political and economic priorities; net exports respond to trading-partner income, exchange rates and trade policy.
A rise in interest rates can reduce mortgage-linked consumption and firms’ borrowing for investment. If both fall, AD shifts left, although the size of the shift depends on the context.
Trace three links: determinant → component → AD direction. Keep other determinants constant while making the model prediction.
Do not shift AD just because the economy’s average price level changes; that is a movement along the existing curve.