1.2 Aggregate Demand Flashcards
What is aggregate demand
The total demand in the economy.
It measures spending on goods and services by consumers, firms, the government and overseas consumers and firms
What is the equation of aggregate demand
C + I + G + (X - M)
What is consumer spending
This is how much consumers spend on goods and services
This is the largest component of AD and is most significant to economic growth
What is disposable income
The amount of income consumers have left over after taxes and social security charges have been removed
What consumers can choose to spend
Where might consumer income come from
Wages Savings Pensions Benefits Investments
How can interest rates influence consumer spending
Lower interest rates make it cheaper to borrow and reduce incentives to save, so spending and investment increase
Also lower the costs of debt which increases the effective disposable income of households
How can consumer confidence and expectations influence consumer spending
Consumers and firms have higher confidence, they invest and spend more because they feel they will make a higher return
Consumers fear unemployment or high taxes then they will spend less and save more
How can the rate of economic growth influence investment
If growth is high, firms will make more revenue due to higher rates of consumer spending. This means more profits available to invest
How can business expectations and confidence influence investment
If firms expect a high rate of return, they invest more
If firms expect commodity prices are due to rise they may postpone their investment decisions
How can demand for exports influence investment
The higher the demand, the more likely firms will invest
This happens as they expect higher sales
They direct capital goods into the markets where consumer demand is increasing
How might interest rates influence investment
Investment increases as interest rates fall as cost of borrowing is less and return to lending is higher
The higher interest rates are, the greater opportunity cost of not saving the money
High interest rates might also make firms expect a fall in consumer spending which discourages investment
How can access to credit influence investment
If banks are unwilling to lend, firms will find it hard to access credit meaning it is harder to gain funds for investments
The availability of funds depends on savings in the economy.
More consumer saving means more funds available for lending
How can the influence of government and regulations influence investment
The rate of corporation tax could affect investment
Lower taxes means firms keep more profits which encourages investment
What is government spending
This is how much the government spends on state goods and services
Such as schools and NHS
How does economic growth influence government expenditure
During a recession, spending may increase to stimulate the economy
This increases government deficit
During economic growth, there is more tax revenue
They may spend less since the economy is already doing well
How does real income influence net trade balances
How does exchange rates influence net trade balances
How does degree of protectionism influence net trade balances
How do non-price factors influence net trade balances
Explain the movements along this AD curve
How can the downward slope of the AD curve be explained
When does a rise in economic growth occur
