Aggregate Demand Flashcards
What is aggregate demand?
Measure of the ability and willingness of all economic agents to spend in the economy
What is the formula for aggregate demand?
AD=C+I+G+(X-M)
What are the components of aggregate demand?
> consumption
investment
government expenditure
exports
imports
What shifts aggregate demand?
A change in any of the factors (C+I+G+(X-M))
What are expectations?
Views about that economic agents have about what will happen to the economy in the future
What do expectations do?
They tell households and firms wether to invest, spend or save
What are consumables?
Items you use up quickly e.g bread, milk, heating
What are consumer durables?
Items that last for a number of years per e.g cars, shoes
What determines consumption?
-income
-wealth
-inflation
-interest rates
-availability of credit
-expectations
-changes in population/ composition of households
What are determinants of savings?
-amount of spending on necessities
-income level
-access to inheritance/wealth
-interest rates
-rate of inflation
What are determinants of investment?
-level of retained profits
-interest rates
-expectations + confidence
-cost of capital goods
-accelerator theory
-government policy (subsidies + taxes)
What is investment?
Addition to the capital stock of the economy
What is the consumption function?
The relationship between consumer expenditure and disposable income
