Aggregate demand Flashcards
(27 cards)
What is AD?
Total level of spending in the economy at any given price
What are the components of AD?
AD = C + I + G + (X-M)
Consumption 60%
Investment 15-20%
Government spending 20%
Net exports 5%
What does the AD curve show the relationship between?
Price and level of real GDP
What are 4 key reasons for a fall in real GDP? (downward sloping ad curve as a rise in prices cause fall in real GDP)
Income effect - price rise not immediately matched by rise in income
Substitution effect - UK price rise, less foreigners will buy British exports, UK residents will buy imported foreign goods as they are cheaper. Imports rise, Exports decrease, so AD contracts
Real balance effect - price rise means the amount people have saved up no longer worth as much so less security and therefore reduce spending, contracting AD
Interest rate effect - price rise means firms must pay workers more so higher demand for money.
What causes movements along AD curve?
Change in prices caused by inflation or deflation
What is consumption?
Spending on consumer goods/services over a period of time
What letter is Disposable income
Y
What is disposable income?
Money consumers have left to spend after taxes deducted/any state benefits added.
Disposable income is affected by government taxation and wages
What is Marginal propensity to consume? (MPC)
How much as increase in income affects consumption
What is average propensity to consume? (APC)
Average amount spent on consumption out of total income
What is the equation for MPC?
Change in consumption
———————————
Change in income
What is Marginal propensity to save?
(MPS)
How much of an increase in income is saved
What is Average propensity to save?
(APS)
Average amount saved out of income
What is the equation for MPS?
Change in savings
————————-
Change in income
What is the equation for APS?
Total savings
——————
Total income
What other factors influence consumer spending? (other than MPC/S APC/S)
Interest rates
Consumer confidence
Wealth effects
Distribution of income
Tastes and attitudes
What is investment?
Addition of capital stock to the economy e.g machines
Only seen as an investment or real products are created
Buying a share would be saving but buying new machinery is investment
What is gross investment?
The amount of investment carried out and ignores the level of depreciation
e.g machinery depreciates losing value over time as it wears out
What is net investment?
Gross investment minus value of depreciation
5 new machines
2 old machines removed
Gross investment = 5 machines
Net investment = 3 machines
What are the influences on investment?
Rate of economic growth
Business confidence/expectations
Demand for exports
Interest rates
Government influence and regulations
Technological change
Costs
What is government spending?
Government spending on defence, education etc. Impact of gov spending changes in tax
