Aggregate Demand Flashcards
What does aggregate demand show the relationship between?
Price level and real GDP
What is the income effect?
Rise in prices not matches straightaway by a rise in income, so real incomes are lower so demand drops
Substitution effect on BoP
Rise in UK prices reduces foreign demand for UK goods + imports rise as they are cheaper, so AD falls as BoP deficit worsens
Real balance effect
Rise in prices means are savings worth less so there is less security, meaning people want to save more, causing a contraction in AD
Interest rate effect on businesses and workers
Rising prices forces businesses to pay workers more so higher demand for money. If supply of money doesn’t change, interest rates will increase due to higher demand - more incentive to save so reduced AD
Marginal Propensity to consume
How an increase in income effects consumption
Marginal propensity to consume calculation
Change in consumption divided by a change in income
Average propensity to consume
Average amount of income spent on consumption
Average propensity to consume calculation
Total consumption divided by total income
Marginal propensity to save
How much of an increased income is saved
Marginal propensity to save (MPS) calculation
Change in savings divided by Change in income
Average propensity to save
Average amount of income saved
Average propensity to save calculation
Total savings divided by total income
Lower Interest rates influence on consumer spending
If decreases, fall in value of shared leading to a negative wealth effect lowering MPC
Higher interest rates effect on consumer spending
Increases value of shares/assets, wealth effect improves MPC
Confidence influence in consumer spending
Confidence on inflation rises consumption, decreased confidence during a recession decreases inflation
Wealth effect on consumer spending
Greater wealth, greater confidence so increased consumption
Distribution of income influence on consumption
Poorer have greater MPC, money goes from rich to poor consumption will increase
What is the issue with machinery investment?
Machinery will lose value over time as depreciates
Gross investment
Amount of money invested over time, ignores levels of depreciation
Net investment
Gross investment minutes the value of depreciation
Economic growths influence on investment
Increased growth raises confidence so greater investment ( and vice-versa )
Business confidence ‘Animal Spirits’ influence on investment
Confident about future, investment will increase as want to prepare for the future
Demand for exports influence on investment
Growth un world economy increases demand for exports showing a growth in export-led industries, increases investment in those areas which may carry onto other businesses
