2.2 aggregate demand Flashcards
aggregate demand formula
C + I + G + (X-M)
downward slope of ad curve causes
-higher prices lead to fall in the value of real incomes so goods and services become less affordable
-high inflation means foreign goods seem relatively cheaper so more exports and deficit on the current account
-high inflation means interest rates will be high which will discourage spending
consumer spending
-how much consumers spend on goods and services
-largest component of ad and most significant to economic growth
-makes up over 60% of gdp
disposable income
the amount of income consumers have after taxes and social security charges have been removed
marginal propensity to consume
how much a consumer changes their spending following a change in income
marginal propensity to save
proportion of each additional pound of household income that is used for saving
influences on consumer spending
-interest rates, low interest rates means more spending
-consumer confidence, high confidence levels means more spending as people are not so worried about the future
-wealth effect, when there is a rise in the price of houses people feel wealthier so they spend more
gross investment
the amount a firm invests in business assets that does not account for depreciations
net investment
-the actual addition to capital stock of an economy after depreciations have been considered
-net investment = gross investment - depreciation
influences on investment
-the rate of economic growth, if growth is high firms make more revenue due to higher rates of consumer spending, more profits to invest
-business expectations and confidence, if they are cleft a high rate of return they will invest more
-interest rates, investment increases as interest rates fall
-government and regulations, rate of corporation tax could affect investment
fiscal policy
-governments use fiscal policy to influence the economy and involves changing government spending and taxation
-demand side policy
-spend on public goods and merit goods as well as welfare payments
discretionary fiscal policy
implemented through one off changes
automatic stabilisers
policies which offset fluctuations in the economy, include transfer payments and taxes and are triggered without government intervention
expansionary fiscal policy
involves increasing spending on transfer payments on boosting ad or reducing taxes
contractionary fiscal policy
-decreasing expenditure on purchases and transfer payments
-tax may increase
-reduces the size of the government budget deficit