Aggregate Demand Flashcards
(24 cards)
Define: Aggregate Demand
AD represents the sum of spending on goods and services produced by a nation over a year.
What makes up AD?
The formula is: AD= C+I+G+X-M C = Consumption I = Investment G = Government Spending X = Exports M = Imports
What does rising AD mean?
Rising AD means that firms are having growing sales, legthening orders and falling levels of unsold goods and services. Businesses become more optimistic about future sales and they increase production, thus manufacturing more supply and therefore using unused resources. This will also create more jobs, thus decreasing levels of unemployment. Therefore, rising AD causes economic activity to expand.
What does slowing AD mean?
Firms go through falling sales and have a surplus of unsold stock. They tend to be more pessimistic about future sales, so they cut production. This means that less resources are being used, and also firms will no longer need a large group of employees. FIrms will let go of some workers, therefore increasing unemployment levels. Therefore, slowing AD causes economic activity to contract.
Define: Private consumption spending
Private consumption spending includes househole expenditure designed to help satisfy an individuals needs and wants for durable and single-use goods and services.
Define: Private investment spending
Private investment spending involves businesses spending on capital, natural and labour resources which they can use to expand production.
Explain what is meant by G1.
G1 represents Government Consumption. It is governemnt expenditure on goods and services used to help satisfy the community’s needs and wants. Wages for staff in government departments, all defence spending and the costs of daily operations are included in G1.
Explain what is meant by G2
G2 represents Government Investment. This incorporates public expenditure on capital equipment (For example; buildings, roads, schools, railways, water supply). It is used to help satisfy society’s wants, expands Australia’s productive capacity and improves the efficiency of other resources.
Define: Private consumption spending
Private consumption spending includes househole expenditure designed to help satisfy an individuals needs and wants for durable and single-use goods and services.
Define: Private investment spending
Private investment spending involves businesses spending on capital, natural and labour resources which they can use to expand production.
Explain what is meant by G1.
G1 represents Government Consumption. It is governemnt expenditure on goods and services used to help satisfy the community’s needs and wants. Wages for staff in government departments, all defence spending and the costs of daily operations are included in G1.
Explain what is meant by G2
G2 represents Government Investment. This incorporates public expenditure on capital equipment (For example; buildings, roads, schools, railways, water supply). It is used to help satisfy society’s wants, expands Australia’s productive capacity and improves the efficiency of other resources.
How much of AD is C worth?
60%
How much of AD is I worth?
Less than 22%
How much of AD is G1 worth?
17%
How much of AD is G2 worth?
3%
How much of AD is Net exports (X - M) worth?
18 - 24%
How much of AD is C worth?
60%
How much of AD is I worth?
Less than 22%
How much of AD is G1 worth?
17%
How much of AD is G2 worth?
3%
How much of AD is Net exports (X - M) worth?
18 - 24%
Define: Consumer Confidence
Explain how it is a Macroeconomic demand-side factor that affects AD
Consumer confidence describe the level of household optimism or pessimism about future employment prospects and income. This affects the levels of saving and consumption spending.
Consumer confidence overall affects C and M, as households must decide whether to spend on local or foreign-made goods and services, or to save their income. Weaker confidence decreases Consumption spending and lifts household savings, thus slowing AD.
Define: Business Confidence
Explain how it is a Macroeconomic demand-side factor that affects AD
Business confidence related to the level of household optimism or pessimism by a firm about its future sales and profits.
Overall, business condifence affects I and M, and firms need to decide whether or not they wish to expand production. If firms are more optimistic about future sales and profits, they can expand production by purchasing more resources in order to lift productive capacity. This will accelerate AD and economic activity.
