Macro 2 - Aggregate Demand Flashcards
Define the term aggregate demand
Aggregate demand is the total planned expenditure on goods and services produced in an economy
What is the formula used to calculate aggregate demand?
AD = C + I + G + (X-M)
What are the different components that make up aggregate demand?
C - Consumer spending / Consumption
I - Investment
G - Government spending
X - Exports
M - Imports
What is consumer spending / consumption?
Consumption / Consumer spending is the total amount spent by households on goods and services. It does not include spending by firms
What effect will an increase in consumption have on aggregate demand?
An increase in consumption will increase aggregate demand
What effect will a decrease in consumption have on aggregate demand?
A decrease in consumption will decrease aggregate demand
What does the government spending component of aggregate demand refer to?
The government spending component of aggregate demand is the money spent by the government on public goods and services. Only money that directly contributes to the output of the economy is included
Are transfer payments such as benefits and pensions included in the government spending component of aggregate demand?
No
When does a budget deficit occur?
If government spending is greater than its revenue, there will be a budget deficit
When does a budget surplus occur?
If government spending is less than its revenue, there will be a budget surplus
What are exports?
Exports are goods or services that are produced in one country, then sold in another
What are imports?
Imports are goods and services that are brought into a country after being produced elsewhere
What is the relationship between exports and imports and aggregate demand?
Exports minus imports (X-M) make up the net exports component of aggregate demand
On an aggregate demand diagram what goes on the x-axis?
Real GDP
On an aggregate demand diagram what goes on the y-axis?
Price level (PL)
On an aggregate demand diagram what letter is used to represent Real GDP on the x-axis?
Y
On an aggregate demand diagram what letter is used to represent Price level on the y-axis?
P
Does the aggregate demand curve slope upwards or downwards?
Downwards
Does the aggregate demand curve slope upwards or downwards?
Downwards
Why does the aggregate demand curve slope downwards?
The lower the price level the more output is demanded. Lower prices mean consumers can buy more goods/services with their money
What effect will a change in the price level have on the aggregate demand curve?
A change in the price level will cause a movement along the AD curve
What effect will a rise in the price level have on aggregate demand?
A rise in the price level will lead to a contraction in aggregate demand
What effect will a fall in the price level have on aggregate demand?
A fall in the price level will lead to an extension in aggregate demand
Why will a rise in the price level cause output to fall?
- Domestic consumption will be reduced as things become more expensive so people can buy fewer goods and services
- The demand for exports will be reduced as domestically produced products become less competitive
- The demand for imports will increase, if prices haven’t risen abroad imports will become cheaper in comparison