2.2 Aggregate Demand Flashcards
(19 cards)
What is aggregate demand (AD)?
Aggregate demand is the total demand in the economy, measuring spending on goods and services by consumers, firms, the government, and overseas entities.
What are the components of aggregate demand?
The components of AD are: C (Consumer spending), I (Investment), G (Government spending), and (X-M) (Exports minus imports).
What is the significance of consumer spending in AD?
Consumer spending is the largest component of AD, making up just over 60% of GDP and is significant for economic growth.
What is investment in the context of AD?
Investment refers to business spending on capital goods, accounting for around 15-20% of GDP in the UK, with ¾ from the private sector.
What does government spending include?
Government spending includes expenditures on state goods and services like schools and the NHS, accounting for 18-20% of GDP.
What does (X-M) represent in the AD equation?
(X-M) represents exports minus imports, indicating the balance of trade. A positive value indicates a surplus; a negative value indicates a deficit.
How does a fall in the price level affect demand?
A fall in the price level causes an expansion in demand along the AD curve.
What happens to demand when the price level rises?
A rise in the price level causes a contraction in demand along the AD curve.
What is disposable income?
Disposable income is the amount of income consumers have left after taxes and social security charges, available for spending.
What is the marginal propensity to consume?
The marginal propensity to consume is how much a consumer changes their spending following a change in income.
What influences consumer spending? (3)
- Interest rates
- Consumer confidence
- Wealth effects.
What is gross investment?
Gross investment is the total amount a firm invests in business assets without accounting for depreciation.
What is net investment?
Net investment is the actual addition to the capital stock after accounting for depreciation. Net investment = gross investment - depreciation.
What factors influence investment? (4)
- Business expectations (most crucial)
- Interest rates and access to credit
- Economic growth and demand for exports
- Government regulations
What is fiscal policy?
Fiscal policy involves changing government spending and taxation to influence the economy.
What are automatic stabilizers in fiscal policy?
Automatic stabilizers are policies that offset fluctuations in the economy without government intervention, such as transfer payments and taxes.
What is net trade?
Net trade is the balance of exports minus imports, indicating the current account status.
What influences the net trade balance? (5)
- Real income
- Exchange rates
- The state of the world economy
- Protectionism
- Non-price factors.
