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Economics- Macro > Aggregate Demand > Flashcards

Aggregate Demand Flashcards

1
Q

Definition of Aggregate Demand:

A

the total planned spending on real output produced within the economy

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2
Q

Equation for AD:

A

AD=C+I+G+X-M

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3
Q

What is AD=C+I+G+X-M?

A

Aggregate demand= consumption + investment + government spending + exports- imports

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4
Q

What causes a fall in AD?

A
  • Cut in government spending
  • Higher interest rate
  • Decline in household wealth (buyer discretionary income decrease)
  • Increase in house price
  • Fall in exports
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5
Q

What causes an increase in AD?

A
  • Expansion of supply credit
  • Lower interest rates
  • Increase in house price (owner wealth increase)
  • Cuts in direct and indirect taxes
  • Depreciation of the exchange rate
    - £ down- uk export cheaper: x^
    - Foreign import expensive: m down
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6
Q

What overall causes a change in AD:

A
  • Changes to monetary policy
  • Changes to government fiscal policy
  • Business and government confidence
  • External shocks
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7
Q

What is aggregate consumption:

A

Spending by all the households in the economy on consumer goods and services

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8
Q

Factors determining consumption:

A
  • Interest rate
  • Current level of income
  • Expected future income
  • Wealth
  • Levels of personal debt
  • Consumer confidence
  • Distribution of income
  • Expectation of future inflation
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9
Q

What is saving and when does it occur?

A

Its household disposable income that is not spent. Occurs when people decide to postpone their consumption until a future time

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10
Q

Factors affecting saving?

A
  • Real interest rate
  • Price expectations
  • Availability of credit
  • Unemployment/ Job security
  • Consumer confidence/Expectations/Uncertainty
  • Taxation on savings
  • Trust in savings institutions
  • Need to pay back debt
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11
Q

What is investment?

A

Planned demand for capital goods which include both physical capital and human capital

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12
Q

Difference between saving and investment:

A

Saving is income that is not spent on consumption. Savings and consumption decisions are made by households
Investment is spending by firms on capital goods such as machines and equipment. Investment decisions are made by firms

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13
Q

Factors affecting investment:

A
  • Expected future sales revenue
  • Expected future costs of production
  • Expected future profit
  • Relative prices of capital and labour
  • Nature of technical progress
  • Supply of investment funds
  • Government policies
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14
Q

What is the accelerator theory?

A

Investment levels are related to the rate of change of GDP.

Assumption: firms wish to keep the capital output ratio fixed

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15
Q

When will the accelerator effect be high?

A
  • Rate of change of consumer income and spending is strongly positive
  • Amount of spare productive capacity for businesses is low
  • Available supply of investment funds is high
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16
Q

What is the negative accelerator effect?

A

When the rate of growth of demand in an industry slows the net investment spending by businesses often fall

17
Q

What is government spending?

A

Spending on state-provided goods and services including public goods and merit goods

18
Q

What is net trade balance?

A

Measures the value of exported goods and services minus the value of imported products

19
Q

What impact does net export have on AD ?

A

A trade surplus means X>M- AD will increase
A trade deficit means M>X- AD will fall
If X=M then trade balance is zero, external trade will have a neutral effect on AD

20
Q

Factors of net export:

A
  • UK productivity
  • Exhange rates
  • Economic growth in other countries
  • Extent of free trade
21
Q

What is a withdrawal/ injection in the AD equation?

A 
C: flow between households and firms, impacted by savings and taxes
I: Injection 
G:Injection
X:Injection 
M: Withdrawal
22
Q

How do you calculate the value of the multiplier?

A

Initial change in injections/ Change in national income

23
Q

What will lead to a negative multiplier and therefore a fall in AD?

A

Cuts in spending and increases in taxes

24
Q

Factors affecting the multiplier effect:

A
  • Interest rates
  • Tax rates
  • Imports
  • Spare capacity

Economics- Macro (21 decks)

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