2.2 Aggregate Demand Flashcards
What is the formula for AD
AD=C+I+G+(X-M)
What are the 4 components of AD?
1)Consumption(C)
2)Investment(I)
3)Government Spending(G)
4)Net Exports(X-M)
Influences on consumer spending?
1)Interest rates
2)consumer confidence
3wealth effects
4)distribution of income
5) tastes and attitudes
What are the 8 influences of investment?
1)business confidence
2)demand for exports
3)interest rates
4)influence of government
5)access to credit
6)retained profit
7)technological change
8)costs
What are the 2 influences on government expenditure?
1)the trade cycle
2)fiscal policy
6 influences on the net trade balance?
1)real income
2)exchange rates
3)state of the world economy
4)degree of protectionism
5)prices
What is aggregate demand?
The total demand for all goods/services in an economy at a given price level.
What is consumption?
The total spending on goods/services by consumers(households) in an economy.
What is Investment?
The total spending on capital goods by firms.
What is government spending?
The total spending by the government in the economy.
How do interest rates affect consumption
IR increase - The reward for saving Increases - Therefore consumption decreases. Vice versa
How does consumer confidence affect consumption?
If individuals have consumer confidence - spending is likely to increase. Vice versa
How do levels of personal wealth affect consumption?
Individuals with higher levels will tend to consume more as they can borrow funds against the value of assets.
How does disposable income affect consumption?
Higher levels of disposable income will normally lead to greater levels of consumption as individuals can afford more goods and services.
How do levels of personal debt affect consumption?
If individuals have low levels of personal debt, they will usually consume more as less disposable income is spent on repayments.
How does the rate of economic growth affect investment?
The faster the pace of economic growth, the sooner capital equipment will wear out or require replacement, so investment increases.
How does business confidence affect investment?
If firms are confident in future economic prospects and the likelihood of consumption increasing, they are more likely to invest in capital projects.
How does the demand for exports affect investment?
This will encourage firms to invest in capital assets in order to increase capacity to meet demand.
How do interest rates affect investment?
Lower interest rates lower the cost of borrowing so investment is less costly therefore investment will increase.
How does access to credit affect investment?
Businesses with more access to credit are likely to invest more in capital assets.
How do government regulations affect investment?
By reducing rules and regulations the government make it easier for firms to invest in capital assets.
How is government spending influenced by the trade cycle?(recession)
In a recession economic growth is negative and government spending will increase. The government will pay more in unemployment benefits however will receive less in tax receipts
How is government spending influenced by the trade cycle?(boom)
Unemployment will fall leading to less spending on benefits. Tax receipts will increase so there will be less pressure on the government The government will use the fiscal policy to manipulate the economy, impacting AD and AS.
How does real income influence net trade?(X-M)
As consumers real income increases demand for goods and services rises, this will lead to an increased demand for exports depending on the marginal propensity to import.
