2.2 Aggregate Demand Flashcards
What is aggregate demand?
The total level of planned real expenditure on the goods and services produced within a country.
What are the components of aggregate demand?
-Household spending on goods and services (C)
-Investment spending (I)
-Government spending (G)
-Exports of goods and services (X)
-(minus) Imports of goods and services (M)
Give the equation for AD.
AD = C+I+G+(X-M)
What does the AD diagram (curve) show?
The AD diagram shows the importance of all the spending in the economy to price levels and GDP.
What is the general price level?
This is the average of current prices across the entire goods and services produced in the economy.
What does a rise and fall in price level cause on AD?
A rise causes a contraction of AD
A fall causes an expansion of AD
What causes the economy to grow and push AD out?
-Fall in exchange rates
-Cuts in taxes so consumers spend more
-Increase in house prices
-Low interest rates
What causes the economy to struggle to grow and push AD in?
-Reductions in government spending
-High interest rates so there are falls in borrowing
-Lack of investment by firms
-Fall in trade with other countries
What is consumption?
Spending on consumer goods and services.
What is saving?
The amount of household income that is not spent.
What is real disposable income?
Income adjusted for inflation and after direct taxes and benefits.
How does real disposable income affect consumer spending?
Increases in real disposable income will cause an increase in consumer spending.
How does employment and job security affect consumer spending ?
Increase in employment will lead to higher incomes and more consumer spending.
How does household wealth affect consumer spending?
A rise in household wealth can increase consumer demand and spending.
How do expectations and sentiment affect consumer spending?
Economic uncertainty causes consumer spending to fall.
