2.2 Aggregate Demand Flashcards
What is AD?
The total demand for a country’s goods and services at a given price level within a given time period.
What is the AD equation?
AD= C + I + G + (X-M)
Factors that cause movements along the AD curve.
- Wealth effect
- Trade effect
- Interest rate effect
What is consumption?
Total spending by households on goods and services in the economy
Biggest part of the equation, 66% in the UK
Determinants of consumption.
- Level of real disposable income
- Interest rates
- Consumer confidence
- Asset prices
- Household indebtedness
What is investment?
When firms spend money on capital goods to increase their productive capacity
Determinants of investment.
- Business confidence
- Interest rates
- Corporation tax
- Spare capacity
- Level of competition
- Price of capital
What is government spending?
Spending money to influence level of economic activity in both short and long run.
Types of gov spending.
- Capital spending
- Current spending
- Welfare spending
- Debt interest payments
What is national debt?
Accumulation of budget deficits.
Total stock of debt overtime.
What is a budget deficit?
When government spending is higher than taxation revenue in a fiscal year
What is a budget surplus?
When government spending is lower than taxation revenues in a fiscal year
Determinants of net exports.
- Real disposable income earned abroad
- Real disposable income earned at home
- Exchange rates
- Protectionism at home or abroad
- Relative inflation levels at home
What is gross investment?
Measures investment before depreciation
What is net investment?
Measures investment after depreciation
