Aggregate Demand Flashcards
(28 cards)
What are the four components of aggregate demand?
Investment
Consumer spending
Gov spending
Net exports
What does aggregate demand mean?
Total demand of goods and services produced within an economy
Formula for AD =
C + I + G + (X-M)
What is consumption
total level of spending by households on goods and services
How do low interest rates affect consumption?
Low interest rates mean people will take out loans to consume
How does income affect consumption?
MPC will increase if income is higher
How does expected future income affect consumption
consumer confidence will be higher as people may feel safe regarding job security
What is the personal savings ratio?
Take your total income and subtract your expenses. What you have left is your savings.
How do expectations of future inflation effect consumption?
Consumers may purchase now if they believe inflation will increase OR even save now if they believe inflatio will increase
What is the largest component of aggregate demand in the United Kingdom?
Consumption
What does MPC mean.
Marginal propensity to consume
List some factors that affect investment decisions?
- prices of capital and labour
- technological processes
- adequacy of financial institutions to supply investment funds
- gov funding
What do I mean by adequacy of financial institutions to supply investment funds?
businesses may be more likely to invest within LIDC countries if they are unable to feel safe when putting their money in banks
What is the multiplier affect economics?
when an initial injection into the circular flow causes a bigger final increase in real national income
multiplier affect formula?
change in real gdp (Y) / change in injections (J)
What does SPICED stand for?
Strong pound imports cheap exports dear
What does WPIDEC stand for?
Weak pound imports dear exports cheap
What is the primary goal of Quantitative Easing (QE) in relation to Aggregate Demand (AD)?
QE aims to increase AD by lowering interest rates and encouraging spending and investment
How does QE affect interest rates and how does that influence AD?
QE lowers long-term interest rates, which reduces borrowing costs and stimulates consumption and investment—components of AD
What is Quantitative Tightening (QT) and its intended effect on AD?
QT is the central bank’s process of reducing its balance sheet by selling assets, which tends to raise interest rates and reduce AD
How does QE affect the exchange rate and what is the impact on AD?
QE can depreciate the currency, making exports cheaper and boosting net exports—another component of AD
Why might QE fail to significantly increase AD in some situations?
In a liquidity trap or recession, consumers and businesses may not respond to lower rates, limiting QE’s effect on AD
What is a liquidity trap?
A liquidity trap is a situation where interest rates are very low, and people prefer to hold cash rather than invest or spend, making monetary policy (like QE or rate cuts) ineffective at stimulating aggregate demand
Who is the current Bank of England governor?
Andrew Bailey
