Aggregate Demand Flashcards
(22 cards)
Define AD
The total demand for a country’s goods and services at a given price level in a given time period
AD = C + I + G + (X-M)
Define the wealth effect
The purchasing power of income increasing / decreasing when the price level changes
Define the trade effect
When the price level decreases, exports become more competitive and imports less competitive
Define the interest effect
As the price level decreases, interest rates can be kept low in the economy
Define consumption
Total spending by households in an economy on goods and services
Makes up around 66% of AD
What factors can affect consumption and therefore shift AD?
Level of real disposable income
- cuts in the marginal rate of income taxes or increases in the level of tax free allowance
Interest rates / availability of credit
- cost of borrowing and rate of returns on savings
Consumer confidence
- affects MPC
- affected by job prospects and level of U
Asset prices (e.g house prices, share prices, bond prices)
- the wealthier people feel, the more likely to spend and the higher MPC
Define MPC
The willingness of a household to spend any extra income they earn
Outline the factors that affect level of savings in the economy
Level of real disposable income
- lower income households spend more on consumption
Interest rates
- higher IR increase the marginal propensity to save
Consumer confidence
- fears of a recession / losing their job, individuals are more likely to save in preparation
Trustworthiness of financial institutions
- developing countries may have a smaller volume of banks as a whole and lower education levels may mean that individuals are not fully aware of the benefits of saving
Tax incentives
- ISAs encourage saving
Define investment
The expenditure on capital goods by firms to increase their productive capacity
Outline the factors that affect a firms marginal propensity to invest
Interest rates
- if they’re looking toward debt financing to fund expenditure
- firms will see return on investments faster when IR are lower
Business confidence
- expected profit, expected future demand in the economy
Level of corporation tax
Level of spare capacity in the business
Level of competition
- high levels of technological development and innovation- businesses are likely to adapt to market forces
EV: depends on the price of capital
Define the accelerator effect
When there is an increase in the rate of real gdp in the economy which encourages further investment
Why is government done
To influence the level of economic activity
Define current spending
Public sector wages
Define capital spending
Infrastructure spending
Define welfare spending
Benefits & pensions
Outline the types of government spending
Current spending, capital spending, welfare spending, debt interest payments
Define debt interest payments
Payments made toward other countries
Which way does AD shift for each type of government spending
Current spending: out
Capital spending: out
Welfare spending: out
Debt interest payments: in
Define budget deficit
gov spending > taxation in a fiscal year
Define budget surplus
gov spending < taxation in a fiscal year
Define national debt
Total stock of debt over time
(Accumulation of budget deficits)
Outline the factors affecting the level of net exports in an economy
Real disposable income earned abroad
- marginal propensity to import goods will increase
Exchange rates
- SPICED (strong pound: imports cheap, exports dear)
- WIDEC (weak {exchange rates}: imports dear, exports cheap)
Protectionism abroad
- tariffs, embargos, quotas
High (relative) inflation
- makes exports less competitive
- makes imports more attractive as they may be cheaper
- reducing the overall bracket
