How the Macroeconomy Works- The determinants of aggregate demand Flashcards
(21 cards)
What is aggregate demand?
Total demand in the economy, measuring spending on goods and services by consumers, firms, the government, and overseas consumers and firms
It is represented by the equation: C + I + G + (X-M)
What is the largest component of aggregate demand?
Consumer spending, making up just over 60% of GDP
It is the most significant factor for economic growth.
What is disposable income?
The amount of income consumers have left after taxes and social security charges
It represents what consumers can choose to spend.
What influences consumer spending?
Interest rates and consumer confidence
Lower interest rates make borrowing cheaper and increase disposable income.
What is the marginal propensity to consume?
How much a consumer changes their spending following a change in income.
What is the marginal propensity to save?
The proportion of each additional pound of household income that is used for saving.
What is the relationship between marginal propensity to consume and marginal propensity to save?
They add up to 1.
What is capital investment?
Accounts for around 15-20% of GDP in the UK, primarily from private sector firms
The government contributes about ¼ of this spending.
What factors influence business investment?
Rate of economic growth, business expectations and confidence, demand for exports, interest rates, access to credit, and government regulations.
What is the accelerator effect?
The level of investment is related to the change in GDP; higher growth causes more investment.
What is government spending as a component of aggregate demand?
How much the government spends on state goods and services, accounting for 18-20% of GDP.
What are transfer payments?
Payments that are not included in government spending figures, as they do not result in output.
What is fiscal policy?
Government policy that influences the economy through changes in spending and taxation.
What are automatic stabilisers?
Policies that offset fluctuations in the economy without government intervention.
What does a positive value of exports minus imports indicate?
A surplus.
What influences the trade balance?
Real income, exchange rates, state of the world economy, degree of protectionism, and non-price factors.
What happens to imports and exports when the pound depreciates?
Imports become more expensive and exports cheaper, potentially narrowing the current account trade deficit.
What is protectionism?
The act of guarding a country’s industries from foreign competition through tariffs, quotas, regulation, or embargoes.
What are non-price factors affecting exports?
Competitiveness of goods and services influenced by innovation, quality, niche markets, labor costs, productivity, and infrastructure.
Fill in the blank: The equation for aggregate demand is C + I + G + _______.
(X-M)
True or False: Government spending is the second largest component of aggregate demand.
False
Government spending is the third largest component of AD.
