2.2 AD Flashcards
Define Aggregate Demand (in words)
The total amount of spending on goods and services produced in an economy during a period of time
Define Consumption
Total household spending
Define disposable income
The income that households have to spend on consumption and saving after having paid taxes
Define average propensity to consume
The proportion of income spent on consumption
Define marginal propensity to consume
The proportion of additional income spent on consumption (change in spending following a change in income)
Define average propensity to save/savings ratio
Proportion of income saved by households
Define savings
Household disposable income that is not spent
Define marginal propensity to save
The proportion of an increase in disposable income that households save
Define the wealth effect
An increase in spending as a result of real or perceived increase in wealth
Define investment
Expenditure undertaken by firms and the government on capital goods
Define interest rate
The cost of borrowing, or the reward for saving
Define depreciation
The fall in value of physical capital goods over time due to wear and tear
Define net investment
Gross investment minus depreciation
Define components
A good used to make another good or a semi-finished good, a form of capital
Define the aggregate demand curve
The relationship between the level of AD and the overall price level, showing planned expenditure at any given general price level
What happens to consumption if real income increases?
Consumption increases
How do you calculate AD from its components?
AD = C + I + G + (X-M)
Name 5 causes of a fall in AD
Decline in household wealth Higher interest rates Cuts in government spending Fall in exports Increase in imports
Name 4 things that would cause an increase in AD
Increase in house prices
Lower interest rates and better credit
Cuts in direct and indirect taxes
Depreciation of the exchange rate
How do you calculate real disposable income?
Real income - tax + benefits
What happens to consumption if savings increase?
There is less money available for consumption
What does a high savings ratio mean for consumption, and therefore AD?
Lower consumption -> Lower AD
Formula for APC
Consumption/Income x 100
Formula for the savings ratio
Savings/Income x 100
What happens to consumption and savings when interest rates rise, and why?
Consumption falls and savings rise because cost of borrowing and reward for saving has increased
Define asset
Things owned by individuals/households that have value
Name 5 main influences of investment
Rate of economic growth
Confidence levels
Interest rates
Animal spirits
Risk
Access to credit
Gov. decisions and bureaucracy
When is investment logical?
If businesses are working at full capacity and expect demand to rise in the future
What do business potentially face if they use past profits to fund investment?
Opportunity cost
Define fiscal policy
Any decision that affects government spending/taxes
Define government expenditure
Government spending on public goods and services e.g NHS
What are the 2 main influences of government expenditure?
The trade cycle and fiscal policy
Name 3 elements of gov. expenditure
Welfare protection
Health (the NHS)
Education
What is a budget deficit?
When gov. expenditure > tax
Can the government spend more than they earn in the short run, or the long run?
Only short run - otherwise lots of national debt is accumulated
What does a budget deficit/surplus do to AD?
Deficit - AD increase
Surplus - AD contract
What happens to gov. expenditure in a recession?
Increases as more areas need more funding, e.g social welfare and education
What is expansionary fiscal policy? and 2 examples of how it is applied
When G > T
e.g tax cuts, spending on infrastructure
What is expansionary fiscal policy and give 2 examples of how it is applied
When G > T
e.g tax cuts, spending on infrastructure
What is contractionary fiscal policy and give 2 examples of how it is applied
When G < T
e.g raising taxes, reducing benefits
Name 6 factors affecting the volume of exports
Economic cycle
Exchange rate
Quality of goods
Productivity
Relative inflation
Protectionism
What happens to AD when there is a trade surplus/deficit?
Surplus - increase AD
Deficit - decrease AD
