1.2 Aggregate Demand Flashcards
What is aggregate demand?
The total demand for goods and services produced in an economy at a given price level and in a given time period.
AD = C+I+G+(X-M)
Factors influencing consumption:
Usually the largest component of AD
1. Real disposable income: As real incomes increase, households tend to spend more. Depends on APC, MPC, MPS.
2. Wealth: The value of assets a household owns. Higher wealth usually means more spending as greater consumer confidence.
3. Consumer confidence and expectations: Optimistic expectations about future job prospects and wages = more spending
**4. Interest rates: **If consumption is financed by borrowing, a fall in IR = more spending as it is cheaper to borrow money.
5. Age structure of population: young and elder spend a high proportion of their income
5. Distribution of income: Poor people spend higher proportion
6. Inflation
Factors influencing investment:
Spending by firms on capital goods
- Rate of interest- cost of borrowing (low IR=cheaper borrowing=cheaper for firms to invest)
- Current profit levels- more profit = more investment
- Expectations/confidence about the future
- Changes in real disposable income- if incomes are rising firms will invest more to meet future demands
- Advances in tech
Factors influencing Government spending
Mainly autonomous- independent of other components
- Level of market failure and intervention
- Level of economic activity (unemplyment, inflation)
- Politics
- War, crime, terrorism
Factors influencing net exports
- Real disposable income at home- more income = more demand for exports
- Real disposable incomes abroad
- Domestic price level relative to price level abroad-
- Exchange rate- higher ER = more demand for imports
- Government restrictions on free trade
What is aggregate supply?
The amount that producers are willing and able to supply at a given price level at a given time.
What is the multiplier?
The process by which any change in a component of AD results in a greater final change in real GDP
Explain the factors that determine the size of the multiplier
How much of the addtional outcome is:
1. Saved by households
2. Returned to the government in the form of direct taxes
3. Spent on imports
4. Multiplier= 1/MPW or 1/MPS+MPT+MPM
What is the accelerator?
When an increase in national income (GDP) results in a proportionally higher increase in in capital investment spending
-Level of investment depends upon the change in real output
What is meant by short-run economic growth?
An increase in the total value/output of all goods and services produced in an economy
Measured in GDP
What is meant by long-run economic growth?
An increase in the productive potential/capacity of an economy
Usually represented by a right-shift of LRAS.
Explain the policy objective of economic growth
Epanding the availability of resources in an economy enables the standard of living to increase.
How do you measure real GDP?
(Where inflationary effects are removed)
Nominal GDP/current year price index * base year index
What is GNI?
(Gross National Income)
- GDP + net income from abroad
Problems with measuring growth and GDP
- Takes no account of changes in population, income inequality, unofficial work, exchange rate, quality of goods/services, other impacts of living standards (externalities, health)
Causes of short-run economic growth
- If an economy is operating below YFE factors of production can be increased (movement to the PPC from a point within it)
- Increase in AD which would increase its component
Causes of growth in the long run
- Result of supply-side factors that increase the productive potential of the economy
- Maybe by increasing the quantity/quality of the FOPs (shift LRAS right)
