The characteristics of Aggregate Demand Flashcards
Which way does the Aggregate Demand curve slope?
Downwards
What does the Aggregate Demand curve show?
Relationship between the price level and equilibrium output in the economy
What does a movement along the Aggregate Demand curve show?
Shows how real output will change if there is a change in the price level.
What is a shift in the Aggregate Demand curve caused by?
Change in any other relevant variable apart from price level
What does Aggregate mean in economics?
Means a ‘total’ or ‘added up’ amount
Define Aggregate Demand.
Is the total of all demands or expenditures in the economy at any given price.
What four components is made out of National Expenditure?
- Consumption
- Investment
- Government Spending
- Exports minus Imports
National Expenditure - What does Consumption mean?
- This is spending by households on goods and services
National Expenditure - What is Investment?
Is spending by firms on investment goods (capital)
National Expenditure - What is Government Spending?
Literally what the government spends its money on, like, Wages, Salaries and Government Spending on Investment goods
National Expenditure - Exports Minus Imports?
When foreigners spend money on goods produced in the UK economy, however, households, firms and governments spend money on goods produced abroad.
What is the AD Equation?
AD = C + I + G + (X-M)
What is Consumption influenced by?
The Rate of Interest in the economy
What happens to consumption if the rate of interest rises?
Consumption falls
What is the Wealth effect?
When a change in value of someone personal wealth influences their spending
What does a STRONG pound mean?
Foreign firms will be able to compete more successfully in the UK economy.
What causes a fall in UK exports?
- Increase in interest rates reduces consumption and investment
- A loss of international competitiveness because UK product prices are high
What is the Average Propensity to Consume?
The proportion of total income that is spent
How does New Technology lead to increased consumer spending?
People want to be up-to-date with the latest technology and so buy it.
How does a Fall in Income tax lead to increased consumption?
Increases consumers disposable incomes so they can spend more.
How can Investment be increased?
- Increase in confidence
- Fall in interest rates
- Increase in Company Profitability (firms have more retained profit to spend)
- A fall in taxes on profits (operation tax)
What will a rise in Government spending do to the deficit?
Cause the deficit to get worse
What factors effect the difference between exports and imports?
- Rise in the exchange rate is likely to lead to lower EXPORTS but higher IMPORTS (Balance of Payments gets worse reducing AD)
Which way does the AD curve shift if AD is getting worse?
Shifts left
