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
what is the difference between the wealth effect in european countries and the US?
- in the US where most people are homeowners the wealth effect takes place
- in euopean countries half th epeople are saving up to buy and house and are renting, so the increase in house perices actually cancels out the wealth affect to 0%
how does a decrease in pension affect AD?
- people will have to save more for future, spending less and reducing cosmption, causing AD to shift left
- those currently retirred have more to spend,
what happens when goverment spending increases?
- increase in goverment spending
- incresae in consumption from new jobs that have been created
what is the impact of an increase in the value of the pound?
appreciation
- imports get cheaper
- exports are more expensive, foreigners need more foreign currency
SPICED
how does the exchange rate affect AD?
appreciation
- demand for imports will increse as they are cheaper (increasing import expenditure)
- demand for exports will decrease as they are more expensive (decrease in export revenue)
- overall AD will decrease
what causes impacts to net trade?
- changes in national income abraod
- chnages in exchange rates
- changes in the level of trade protection
define aggregate demand
the total planned spending on goods and services demanded in the economy at a given price level
define consumption
total planned household spending
define disposable income
the income that households have to devote to consumption and saving, taking into account payments of direct taxes and transfer payments
animal spirits
the level of confidence of business owners
define investment
spending by busininessses on capital goods, which leads to the creation of real goods
net trade
exports minus imports
exports
goods/services sold to foreigners that brimg income into the country
define imports
goods/services bought from foreigners thattakes income out of the country
define net investment
investment adjusted for depreciation; gross investment minus depreciation
wealth
a stock of assets
