Aggregate Demand Flashcards
Define aggregate demand
The total demand in the economy. It measures spending on goods and services by consumers, firms, government and overseas consumers and firms
What is the marginal propensity to consume
- How much a consumer changes their spending following a change in income
- consumers on low incomes are more likely to spend
What’s the marginal propensity to save?
The proportion of each additional pound of household income that is used for saving
MPC + MPS =
1
Influences on consumer spending
- interest rates
- consumer confidence
- wealth effects
What is gross investment?
The amount a firm invests in business assets that doesn’t account for depreciations
What is net investment?
- The actual addition to the capita stock of an economy after depreciation have been considered
- net investment = gross investment - depreciation
Influences on investment
- rate of growth
- business expectations and confidence
- demand for exports
- interest rates
- access to credit
- government influences and regulations
Influences on government expenditure
- the trade cycle
- fiscal policy
What is the trade cycle
- it refers to the stage of economic growth that the economy is in
- the recovery stage shows periods of economic growth
- the boom is when growth is fast
- during recessions there is negative growth and the real output falls
What is fiscal policy?
- used by the gov to influence the economy
- changing gov spending and taxation
What might the gov spend on in fiscal policy
- public goods.
- merit goods
- welfare payments
Is fiscal policy demand or supply side
Demand - so it works by influencing the level of AD
What is discretionary fiscal policy
A policy that’s implemented through one off policy changes
What are automatic stabilisers
- Policies that offset fluctuations in the economy
- include transfer payments and taxes
-triggered without gov intervention
What might the government use during periods of economic decline?
- expansionary fiscal policy
- involves increasing spending on transfer payments or boosting AD or reducing taxes
What might the gov use during periods of economic growth?
- contraction are fiscal policy
- involves decreasing expenditure on purchases and transfer payments or boosting
-tax rates might increase
Influences on the trade balance
- real income
-exchange rates - state of the world economy
- protectionism ( tariffs and quotas etc. )
- non price factors ( competitiveness)
