2.2 Aggregate Demand Flashcards
(34 cards)
what is the definition of AD
the total demand for all G/S in an economy at any given average price level
equation for AD
C + I + G + (X-M)
what does it mean if AD increases
economic growth has occured
what is the definition of consumption
the total spending on G/S by consumers in an economy
what is the definition of investment
when firms spend money on capital goods to increase their productivity
what is the definition of government spending
the total spending by the government in the economy
what is the definition of net exports
the difference between the revenue gained from exports and the expenditure on imports
why is the AD curve downward sloping
the interest rate effect
the wealth effect
the exchange rate effect
what is the interest rate effect
higher interest rates reduce investment and are an incentive for households to save instead
what is the wealth effect
as a person’s assests increase in price, they consume more as they feel wealthier
what is the exchange rate effect
SPICED (strong pound imports cheaper exports dearer) and WPIDEC (weak pound imports dearer exports cheaper)
what happens to the AD curve when there is a change in average price level
there is a movement along the AD curve
when does a shift in the AD curve occur
when there is a change in any of the determinants of AD
what is disposable income (RDY)
money that households have left over from their wages after they have paid direct taxes and received any subsidies/benefits
what are the determinants of consumption
level of RDY
interest rates/availability of credit
consumer confidence (jobs, u/e)
asset prices
household debts
what are the determinants of saving
level of RDY
interest rates
consumer confidence
range/trustworthiness of financial institutions
tax incentives
age structure of population
how do interest rates affect consumption
higher interest rates give a greater incentive to save and will increase mortgage payments, so there is less consumption
how does consumer confidence affect consumption
consumers are more confident of receiving a regular salary
better job prospects
lower risk of unemployment
what is depreciation
the decrease in monetary value of a capital good (asset) over time
why would firms choose to invest
increased growth in the economy signals that higher output will result in higher profit
decreased interest rates will encourage firms to take out more loans for investment
increased demand for exports will encourage firms to invest to meet global demand
government regulation and intervention
what are the determinants of investment
interest rates
business confidence
corporation tax (retained profit)
spare capacity
level of competition
price of capital
what determines business confidence
expectation of future profit
expectation of future demand in the economy
how does the accelerator effect affect investment
an increasing rate of real GDP in the economy which encourages further investment
what are the influences of government spending
rate of unemployment
tax revenue
