2.2 Flashcards
What is the definition of aggregate demand?
The total demand for all goods and services in an economy at any given price level over a period of time.
What are the 4 main components of AD?
Consumption (C)
Investment (I)
Government Spending (G)
Net Exports (X-M)
What is the formula for AD?
C+I+G+(X-M)
What is the definition of Price Level?
The average prices for all goods and services in an economy.
What is the definition of Real National Output?
The output of the economy taking into account inflation.
How does price affect AD?
A change in price causes a movement along the AD curve.
What causes a shift in AD?
A change in any components in AD (C + I + G + (X-M).
What determines the level of consumption in a household?
- Disposable Income
- Interest rates (higher = more savings)
- Levels of personal debt
- Levels of personal wealth
- Confidence
What is marginal propensity to consume/save?
How likely an individual is to consume or save an extra £1 of income they receive.
What are durable goods?
Goods that don’t wear out and last over a long period of time
What are semi-durable goods?
Goods that are neither perishable nor lasting e.g. clothes.
What are non-durable goods?
products that are consumed or can only be used for a short period of time e.g food
What is Net Investment?
Spending on capital assets such as machines.
This increases productive capacity and economic growth.
What is Gross Investment?
Net investment less depreciation and replacement costs
e.g. a firm replaces 10 cars with 12 new ones. = 2
What is investment?
Buying assets
What influences Investment?
- The rate of economic growth
- Business expectations and confidence
- Keynes Animal spirit
- Demand for exports
- Interest rates
- Access to credit
- Influence on government regulations.
What is Keynes animal spirit?
A collective mood of investors. When this is strong, investment increases, increasing AD
What influences government spending?
- The trade cycle
- Automatic stabilisers (unemployment benefit)
Current expenditure
Spending on the day to day running of the country
Capital expenditure
Spending on physical assets to improve infrastructure.
