Unit 3.2·Macroeconomics

Determinants of AD Components

Variations in Economic Activity: Aggregate Demand and Aggregate Supply

AO2

Syllabus requirement

Explains the factors affecting each component of AD: e.g., consumer confidence, interest rates, income taxes, exchange rates.

Assessment objectives

AO2 Application and Analysis

Summary

This topic explains the main determinants of the components of aggregate demand (AD = C + I + G + X − M) and how changes in those determinants shift the AD curve. It covers factors that influence consumption, investment, government spending and net exports, and describes the directions in which they move aggregate demand ceteris paribus. Understanding these relationships helps predict how policy or shocks affect national output and price levels.

Real-world examples for this unit

Airplane, freight truck and telephone network representing U.S. deregulation

U.S. Deregulation of Transportation and Telecommunications

Market-Based Supply-Side Policy1978 to 1996

U.S. dollar relief payments and government support during the COVID-19 economic downturn

U.S. COVID-19 Fiscal Relief Response

Expansionary Fiscal Policy2020 to 2021

Bank of Japan building with an upward interest-rate symbol

Bank of Japan Interest Rate Hikes in 2025

Contractionary Monetary Policy2025

European Central Bank building with a downward interest-rate symbol

ECB Interest Rate Cuts in 2025

Expansionary Monetary Policy2025