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AS Economics > 2.2 Aggregate Demand > Flashcards

2.2 Aggregate Demand Flashcards

1
Q

what are the 4 components within the expenditure method?

A
  • consumer spending
  • investment
  • goverment spending
  • net trade (exports-imports)
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2
Q

describe the income method of calculating GDP

A

adding up all the icnomes within an economy

wages, intresr, profits, rent

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3
Q

What does the diagram for aggregate demand look like?

A

National income / real GDP/ national output /national expenditure

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4
Q

what is aggregate demand?

A

all the demand for goods and services in an economy

aggregate= added up

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5
Q

what is the formula for aggregate demand?

A

AD= C+ I + G + (X - M)
* consumption
* investment
* goverment spending
* exports- imports

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6
Q

what are the 4 components of aggregate demand?

A
  • consumption (households- consumer goods)
  • investment (firms demand- capital goods)
  • goverment spending (goverment demand - schools/hospitals)
  • net exports (exports foreigners demand, imports demands leaving economy )
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7
Q

calculate the percentage of each component:

A
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8
Q

what is gross investment?

A

the orginal value of a capital good

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9
Q

what is net investment?

A

gross investment - depreciation

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10
Q

what happens to aggregate demand when there are
1. increases in price level
2. decereases in price level

A
  1. contraction in aggregate demand (real GSP decreases)
  2. extension in aggregate demand (real GDP increases)
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11
Q

what is the share of each componenet of aggregate demand?

A
  • consumption (60%)
  • investment (14%)
  • goverment spending (25%)
  • exports minus imports (1%)
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12
Q

what factors cause shifts in AD?

A
  • income
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13
Q

how does a decraese income impact AD?

A
  • 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

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14
Q

what is disposable income?

A

the amount of income left over after paying taxes, availiable to spend

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15
Q

what happens to AD when income increases?

A
  • increase in consumption
  • firms make more sales, more profit to invest
  • goveremnt collects more income,
  • increase in goveremnt spending
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16
Q

what are benfits?

A

payments made from the goveremnt to low income workers or umeployed

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17
Q

what component does benefits affect?

A
  • 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)

18
Q

what does the intrest rate tell you

A
  • savers: return upon savings
  • borrowers: how much you will have to pay back- cost of borrowing

longer time= more intrest to pay

19
Q

what is the impact of savings upon consumption?

A
  • decreases consumption
  • considered a withdrawal from the economy
  • downward multiplier effect
20
Q

what is the impact of intrest rates?

A
  • more money for savers
  • less money for mortage holders
  • less money for firms who want to invest
21
Q

what are the effects of intrest rates on AD?

A
  • 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
22
Q

how does consumer confidence affect AD?

A

decrease in consumer cofidence, they save more,decreaing consumption, causind AD to shift to the left

23
Q

how does an increase investor confidence impact AD?

aka high animal spirirts

A
  • more investor confidence
  • more investment
  • shift in AD to the right
24
Q

how does the wealth effect impact AD?

A

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

25
Q

what is the difference between the wealth effect in european countries and the US?

A
  • 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%
26
Q

how does a decrease in pension affect AD?

A
  • 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,
27
Q

what happens when goverment spending increases?

A
  • increase in goverment spending
  • incresae in consumption from new jobs that have been created
28
Q

what is the impact of an increase in the value of the pound?

appreciation

A
  • imports get cheaper
  • exports are more expensive, foreigners need more foreign currency

SPICED

29
Q

how does the exchange rate affect AD?

appreciation

A
  • 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
30
Q

what causes impacts to net trade?

A
  • changes in national income abraod
  • chnages in exchange rates
  • changes in the level of trade protection
31
Q

define aggregate demand

A

the total planned spending on goods and services demanded in the economy at a given price level

32
Q

define consumption

A

total planned household spending

33
Q

define disposable income

A

the income that households have to devote to consumption and saving, taking into account payments of direct taxes and transfer payments

34
Q

animal spirits

A

the level of confidence of business owners

35
Q

define investment

A

spending by busininessses on capital goods, which leads to the creation of real goods

36
Q

net trade

A

exports minus imports

37
Q

exports

A

goods/services sold to foreigners that brimg income into the country

38
Q

define imports

A

goods/services bought from foreigners thattakes income out of the country

39
Q

define net investment

A

investment adjusted for depreciation; gross investment minus depreciation

40
Q

wealth

A

a stock of assets

AS Economics (24 decks)

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