1.2 Aggregate Demand Flashcards
What is aggregate demand?
The total spending on domestically produced goods and services in an economy over a given period of time
What is consumption (C)
The total spending by households on goods and services in an economy over a given period of time
What is investment (I) (can be shown as gross fixed capital formation/GFCF in data)?
The total spending by firms on capital goods in an economy over a given period of time
What is government expenditure (G)
The total spending by the government on final goods and services in an economy over a given period of time
What is net exports (X-M)?
The total value of exports minus the total value of imports over a given period of time
What is disposable income?
Income - direct taxes
What is discretionary income?
Disposable income - all payments required to meet essential bills
What is saving (S)?
What is not spent out of disposable income
What is the average propensity to consume (APC)?
C/Y
What is the marginal propensity to consume (MPC)?
Change in C/Change in Y
What is the multiplier formula?
1/1-MPC
What is the multiplier effect?
When an initial injection into the circular flow of income causes a greater increase in real national income
What are the determinants of consumption?
Disposable income, wealth, consumer confidence, interest rates, inflationary expectations, age composition of households
What is gross investment?
The total amount the economy spends on new capital and on replacing depreciated capital
What is net investment?
Gross investment - depreciation
What are the determinants of investment?
Interest rate, real disposable income, business expectations and confidence, retained profits, corporation tax, access to credit, the world economy, government intervention
What is the accelerator effect?
When an increase in the rate of growth of GDP can lead to a larger than proportional increase in investment, further accelerating increases in national income
What is induced investment?
Investment made to purchase new capital to produce goods and services
What is replacement investment?
Investment made to replace worn out capital
What is the marginal capital-output ratio (k)
Change in K/Change in Y
What are the determinants of government spending?
Political considerations (election promises), policy objectives, economic activity (leads to tax revenue), willingness and ability to borrow
What are exports (X)
The total spending on domestically produced goods and services by foreign households, firms and governments
What are the determinants of net exports?
- Real disposable income in domestic and foreign economies
- Price level in domestic economy
- Relative inflation rate
- Exchange rate
- Trade policy and protectionism
What are imports (M)?
The total spending on foreign produced goods and services by domestic households, firms and government
Why is the AD curve sloping downwards?
Wealth effect, net export effect, interest rate effect
