AQA A-Level Economics (7136) · The National & International Economy
Specification points
- The components of aggregate demand (AD).
- The determinants of consumption, investment, government spending and net exports.
- The multiplier process.
Aggregate demand
AD = C + I + G + (X − M)
The AD curve slopes downwards (real wealth, interest-rate and trade effects). Consumption (C) is usually the largest component.
Determinants of the components
- Consumption — income, interest rates, confidence, wealth.
- Investment — interest rates, business confidence, profits, technology.
- Government spending — set by fiscal policy.
- Net exports — exchange rate, world incomes, competitiveness.
The multiplier
An injection of spending creates further rounds of income and spending, so real output rises by *more* than the initial injection.
Multiplier = 1 ÷ (1 − MPC) = 1 ÷ MPW
The larger the marginal propensity to consume (and the smaller the withdrawals — saving, tax, imports), the larger the multiplier.
Key definitions
| Term | Definition |
|---|---|
| Aggregate demand | Total planned spending at each price level. |
| Marginal propensity to consume | The fraction of extra income that is spent. |
| Multiplier | The ratio of the final change in income to the initial change in spending. |
Worked example
A government invests £5bn in infrastructure. With an MPC of 0.75, the multiplier is 1 ÷ (1 − 0.75) = 4, so real income could rise by up to £20bn — though leakages and limited spare capacity reduce the effect near full capacity.
Common exam mistakes
- Omitting or double-counting a component of AD.
- Confusing a shift of AD (a component change) with a movement along (price level).
- Using the wrong propensity in the multiplier.
Exam technique
Identify which component shifts AD and why, then use the multiplier to judge the scale of the effect, evaluating with spare capacity.
Quick revision
- AD = C + I + G + (X − M).
- Multiplier = 1 ÷ (1 − MPC).
- Larger MPC, smaller leakages → larger multiplier.