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.
How do interest rates affect consumer spending?
Lower interest rates cuts the cost of paying debt on a mortgage or loan so disposable income increases and so does consumer spending.
What was Keynes theory about consumption?
-Households can either spend or save the disposable income.
-At low levels of income people spend all of their income.
-As incomes increase people will save more of their income.
-Rich people have a higher propensity to save.
What is the marginal propensity to consume (MPC)?
The proportion of any extra income that you earn and you spend.
What is the marginal propensity to save (MPS)?
Is the proportion of any extra income that you earn and you save.
What is the formula for propensity to consume?
MPC + MPS = 1
What is investment?
It is the purchase of goods that are not consumed today but are used in the future to create wealth.
What is gross investment?
The total investment on new capital inputs.
What is net consumption?
This is gross investment adjusted for capital consumption.
What factors affect investment?
-Actual and expected demand
-Expected profits and business taxes
-Interest rates + availability of finance
-Business confidence
What does ‘animal spirits’ mean?
This refers to the state of confidence or pessimism held by consumers and businesses.
What is the fiscal policy?
Means by which the government adjusts its spending levels and tax rates to monitor and influence a nations economy.
What does the fiscal policy do?
-Change the pattern of spending on goods and services
-Impacts the level of AD, output and jobs
What is the expansionary fiscal policy?
It happens when the government increases government spending and reduces taxation.
What is the deflationary fiscal policy?
Happens when taxes are increased and spending is reduced.
