AD & AS Flashcards
(30 cards)
What is the definition of Aggregate Demand (AD)?
Total spending in an economy
Aggregate Demand includes spending by consumers, firms, government, and net exports.
What are the four components of Aggregate Demand?
- Consumers (households)
- Firms
- Government
- Net exports (exports - imports)
What is consumer expenditure?
Spending by households on goods and services to satisfy current wants
What primarily influences consumer expenditure?
Disposable income levels
What is dissaving?
When consumer expenditure exceeds income
What are other factors influencing consumer expenditure?
- Distribution of income (tax rates & welfare)
- Rate of interest (higher or lower)
- Availability of credit
What does investment in the context of Aggregate Demand refer to?
Private sector spending by firms on capital goods
What influences the amount of private sector investment?
- Levels of consumer demand
- Interest rates
How can governments influence private sector investment?
By manipulating business tax rates and stimulating demand
What does government spending include?
- Expenditure on merit goods (education, healthcare)
- Public goods (defense)
How do tax rates impact government spending?
Higher income tax rates can lead to higher tax revenues for government spending
What influences the level of net exports?
- GDP of a country
- Other countries’ GDP
- Pricing and competitiveness of products
- Exchange rate
What is the relationship between GDP and imports?
When GDP rises in a country, demand for imports usually increases
What is the shape of the AD curve?
Shows different quantities of total demand for an economy’s products at different prices
What happens to AD when the general price level rises?
AD contracts
What is the wealth effect?
A rise in price levels impacts how much people can buy
What is the international effect?
A rise in price level reduces demand for net exports
What is the interest rate effect?
A rise in price level increases demand for money, raising interest rates
What can cause shifts in the AD curve?
- Changes in consumer expenditure
- Changes in investment
- Changes in government spending
- Changes in net exports
What are some factors that can increase consumer expenditure?
- Rise in confidence
- Cut in income tax levels
- Increase in wealth
- Rise in money supply
- Rise in population
What are some factors that can increase investment?
- Rise in business confidence
- Cuts in business tax
- Advances in technology
What does the positive relationship between price levels and supply indicate?
As general price levels rise, producers are willing to supply more
What is Short Run Aggregate Supply (SRAS)?
Output supplied in a period when price factors of production have not adjusted
What causes shifts in the AS curve?
- Change in price of factors of production
- Change in tax rates on firms
- Changes in factor productivity/quality
- Change in quantity of resources
