1.2 AD Flashcards
Definition of AD
The total spending on goods and services produced in an economy at a given price level and time period.
Definition of PL
An average of the price where the economy will settle with no changes of supply or demand.
What is an increase in the PL known as?
Inflation
AD equation
AD = C + I + G + (X-M)
Components of AD
Consumer expenditure
Investment expenditure
Government spending
Net expenditure on exports (X) and imports (M)
Consumer expenditure definition
Defined by the spending of households
Largest part of AD in the UK
Factors affecting the size of C
Real disposable income
Wealth
Consumer confidence / expectations
Job security
Rate of interest
Distribution of income
Inflation
Factors affecting the size of C - consumer expectations
If people expect an improvement in the economic outlook, they will be more willing to borrow and buy goods
If people have negative expectations about the economy, they will cut back on spending and not take risks.
Savings definition
Difference between real disposable income and consumption
Factors affecting saving
Interest rates
Inflation
Age profile of the country
Real disposable income
Tax levels
Saving schemes
Investment definition
A firms spending on capital goods
Most volatile of all the components
Influences on I
New technologies
Real disposable income
Corporation tax
Expectations
Rate of interest
Capacity utilisation
Price of capital equipment
Gross investment
Total amount an economy spends on capital
Net investment
Takes capital depreciation into account of the overall spending on capital
Government spending definition
Spending by central and local governments on goods and services
Influences of G
War
Market failure
E2 of economic activity
Politics
Changes in G
Current spending
Capital spending
Transfer payments
Debt interest payments
Current spending
Day to day running of public services
Capital payments
Spending on social infrastructure
Such as schools
Transfer payments
Benefit / pension payments
Subsidies
Debt interest payments
Payments to holders of government debt
Treasury bill
Influences on X - M
Real disposable income abroad
Government trade restrictions
Real disposable income at home
Domestic price level
Exchange rate
What does the AD curve show?
The quantity of goods and services which households, firms, oversees buyers and governments are prepared to buy at different values of the general price level.
Expectations
Assumptions made about the future of the economy
Role of expectations on individuals
Inflation - people buy more/ less
Saving rates - people save more / less
Role of expectations on firms
C + interest rates + x rev = invest more / less
