2.2 Aggregate Demand Flashcards
what are the 4 components within the expenditure method?
- consumer spending
- investment
- goverment spending
- net trade (exports-imports)
describe the income method of calculating GDP
adding up all the icnomes within an economy
wages, intresr, profits, rent
What does the diagram for aggregate demand look like?
National income / real GDP/ national output /national expenditure
what is aggregate demand?
all the demand for goods and services in an economy
aggregate= added up
what is the formula for aggregate demand?
AD= C+ I + G + (X - M)
* consumption
* investment
* goverment spending
* exports- imports
what are the 4 components of aggregate demand?
- consumption (households- consumer goods)
- investment (firms demand- capital goods)
- goverment spending (goverment demand - schools/hospitals)
- net exports (exports foreigners demand, imports demands leaving economy )
calculate the percentage of each component:
what is gross investment?
the orginal value of a capital good
what is net investment?
gross investment - depreciation
what happens to aggregate demand when there are
1. increases in price level
2. decereases in price level
- contraction in aggregate demand (real GSP decreases)
- extension in aggregate demand (real GDP increases)
what is the share of each componenet of aggregate demand?
- consumption (60%)
- investment (14%)
- goverment spending (25%)
- exports minus imports (1%)
what factors cause shifts in AD?
- income
how does a decraese income impact AD?
- disposable icmome decreaes, so cosumers have less to spend, reducing consumption, decreasing AD, shifting curve to left
- Less disposable income means less spent on firms and businesses, so they will not be able to make as much investment
- less tax able to be collected by goverments- less to spend (tax revenue)
income tax, corporation tax, VAT
what is disposable income?
the amount of income left over after paying taxes, availiable to spend
what happens to AD when income increases?
- increase in consumption
- firms make more sales, more profit to invest
- goveremnt collects more income,
- increase in goveremnt spending
what are benfits?
payments made from the goveremnt to low income workers or umeployed
what component does benefits affect?
- not goverment spending (not acc spending),
- increase in consumption as those households will eventually spend the benefits
- overall increase in aggregate demand
however opportunity costs of other projects (decrease in G)
what does the intrest rate tell you
- savers: return upon savings
- borrowers: how much you will have to pay back- cost of borrowing
longer time= more intrest to pay
what is the impact of savings upon consumption?
- decreases consumption
- considered a withdrawal from the economy
- downward multiplier effect
what is the impact of intrest rates?
- more money for savers
- less money for mortage holders
- less money for firms who want to invest
what are the effects of intrest rates on AD?
- Consumers are encouraged to save more and spend less, less C
- consumers have to pay a higher mortage and would have less disposable income, less C
- firms are discouraged to invest, less I
- AD falls, shift in AD to the left
how does consumer confidence affect AD?
decrease in consumer cofidence, they save more,decreaing consumption, causind AD to shift to the left
how does an increase investor confidence impact AD?
aka high animal spirirts
- more investor confidence
- more investment
- shift in AD to the right
how does the wealth effect impact AD?
as assets value incrreases, wealth increases,consumers feel as tho they have more financial stability so consumers are more confident, more household spending = more consumption
happens when house prices increase
