2.2 Aggregate Demand ( AD ) Flashcards
What are the components of aggregate demand ?
Consumption
Investment
Government spending
Net exports
What is the equation for aggregate demand ?
C + I + G + ( X - M )
What is consumption ?
Consumer spending on goods and services
What is the biggest proportion of UK AD ?
Consumption - taking up 60% of AD
What is investment ?
The spending by businesses on capital goods such as new equipment or buildings : working capital.
What percentage does investment take up of aggregate demand ?
15 - 20% - more by the private sector than government.
What is Government spending ?
Government expenditure on providing goods and services, generally public and merit goods.
Give examples of government expenditure.
Wages and salaries of public sector workers and on investment goods like new roads and schools.
What are transfer payments and why aren’t they included in the government spending section ?
Transfer payments are things like pensions and jobseekers’ allowances but are not included in the figure as money is just transferred from one group to another.
What percentage does Gov spending take up in aggregate demand ?
18 - 20 % of GDP
What are net exports ?
Export value minus imports value
What percentage do net exports account for in AD ?
Around 5%
What is the difference between aggregate demand and demand ?
The demand curve is used for individual markets, ie the market for cat food. Aggregate demand is used to show the relationship between a general price level and real GDP. ( a good isn’t specified ).
Why is the AD curve downward sloping ?
The income effect
The subsititution effect
Real balance effect
Interest rate effect
Explain the income effect.
As a rise in prices is not matched straight away by a rise in income, people have lower real incomes so can afford less, leading to a contraction in demand.
