macro - the components of aggregate demand

Question 1

in the circular flow, the total spending (expenditure) must equal…

Answer 1

the total demand in the economy

Question 2

what is aggregate demand?

Answer 2

the total demand of goods and services produced in an economy at a given price level, in a given time period.

Question 3

where does this aggregate demand/planned expenditure come from?

Answer 3

households
firms
government
foreigners

Question 4

what are the components of AD?

Answer 4

C + I + G + (X-M)

consumer expenditure + investment + government spending + (exports - imports)

Question 5

what is the largest component of AD?

Answer 5

consumer expenditure/consumption

spending by households on items such as clothing, food and insurance.

Question 6

what factors affect consumer spending?

Answer 6

real disposable income 
household wealth
consumer confidence and expectations (e.g. job security)
market interest rates
the age structure of the population
distribution of income
inflation

Question 7

what did John Maynard Keynes suggest that the most important determinant of consumer spending is?

Answer 7

real disposable income - “As real incomes rise, household consumers spend more.”

depends on APC, MPC and MPS

Question 8

what is household wealth and how does it influence how much households spend?

Answer 8

“The value of assets that a household holds”. higher household wealth (e.g. value of their home, savings account and shares), tend to spend more.

it results in greater consumer confidence.

Question 9

how does consumer confidence influence how much households spend?

Answer 9

optimistic feelings about future job prospects, and wages leads to increased consumer spending.

Question 10

how does market interest rates influence consumer spending?

Answer 10

a fall in the R.O.I usually leads to rise in consumer expenditure as:

cheaper to borrow money
reduces incentive to save

BUT net savers - will spending always rise?

Question 11

other influences on consumer spending

Answer 11

the age and structure of the population - generally the young and the elderly spend a relatively high proportion of their income.

distribution of income - poor people spend a higher proportion of their income than rich people.

inflation - if prices are rising fast, people may increase their spending now, or hold off from their current spending.