2.2 Aggregate Demand Flashcards
What is aggregate demand?
The total demand for all goods and services in an economy at a given average price
How is aggregate demand calculated?
Consumption + investment + government spending + (exports - imports)
What is consumption?
The total spending on goods and services by consumers in an economy. 60%
What causes a movement along the AD curve?
Change in the average price
What causes a shift in the AD curve?
Change in any of the components of AD
What is disposable income?
Money households have left from their salary after they have paid their taxes and received transfer payments
How does disposable income influence consumption?
Increase tax, decrease disposable income, and decrease consumption
Decrease wages, decrease disposable income and decrease consumption
How does savings influence consumption?
Increase in savings, decrease in consumption
How to work out average propensity to consume or save?
APC/APS =
consumptions or saving. / Disposable income. *100
How does interest rates influence consumption?
increase in interest rates, increase in cost of borrowing/reward for saving, decrease in disposable income, decrease in consumption
How does consumer confidence influence consumption?
stronger economy, households more secure in their jobs/recieve regular salary payments, increase in consumer confidence, decrease in saving, increase in consumption
How does the wealth effect influence consumption?
increase in consumer wealth, increase in consumption
increase in property prices, increase consumer confidence to borrow, increase consumer wealth, increase in consumption
What is investment?
The total spending on capital goods by firms. 15%
helps increase capacity = increased potential economic growth
What is depreciation?
the decrease in monetary value of a capital good over time
(replacing old capacity doesn’t always mean increase in capacity)
What is gross investment?
total amount of spending on capital goods
(includes replacing old capital goods)
