2.2 Aggregate demand Flashcards
What is aggregate demand
The total demand for all goods/services in an economy at any given average price level;
What is the calculation for AD?
AD= consumption (C) + Investment (I) + Government spending (G) + (Exports - Imports) (X-M)
AD = C + I + G + (X-M)
What does an increase in AD mean
Economic growth has occured
What is consumption
The total spending of goods and services by consumers in an economy
What is investment
Total spending on capital goods by firms
what is Government spending
The total spending of the government in the economy
What is net exports
The difference between the revenue gained from selling goods/ services from abroad and the expenditure on goods/ services from abroad
What happens to the AD curve if there is a change in average price level
There is a movement along the AD curve
What happens when there is a change of any of the determinants of aggregate demand
There is a shift of the entire AD curve
An increase in a determinant a shift right of the entire curve
A decrease in a determinant results in a shift left of the entire curve
What is disposable income
The money that household have left from their salary/wages after they have paid their taxes
What effects disposable income
increase in taxes= disposable income decreases
fall in wages = disposable income decreases
What is the relationship between savings and consumption
Savings decrease = consumption increases
savings increase = consumption decreases
Influences on consumer spending
Interest rates- higher interest rate = greater incentive to save
Changes to consumer confidence, high consumer confidence = higher spending
changes to wealth, consumer wealth increases = increase in consumption
What is depreciation
Depreciation is the decrease in monetary value of capital goods over time
What is gross investment
Gross investment is the total amount of spending on capital goods
What is net investment
gross investment - depreciation
What are key influences on decisions by firms whether to invest or not?
Rate of economic growth
interest rates
Demand for exports
Influence of government and regulations
How does the rate of economic growth influence a firm to invest?
Increasing growth indicates that higher output will generate higher profits
How do interest rates influence a firm to invest?
Decreasing interest rates encourage investment due to less costs to pay back on loans
How does the demand for exports influence a firm to invest?
If demand increases firms will likely invest to meet demand
What is the trade/business cycle
The stages of economic growth that an economy moves through including boom. slowdown, recession and recovery
What is the influence of the trade cycle on government expenditure
Unemployment decreases with a booming economy leading to a lower level
Tax revenue increases with a booming economy and can be used to pay gov debt
What are the influences of policy aims on government expenditure
Fiscal policy is set once a year and announce during the presentation of the governments budget
What is the net trade balance
The difference between the value of exports and imports
What are factors that can influence net trade
UK real income increases
Real income increases abroad
UK £ (appreciates/depreciates)
World economy booms/slows
protectionism (increases/decreases)
How does UK real income affect net trade
If real income increases there is likely to be an increase on the amount of imports bought. This weakens the trade balance
Little effect on exports
How does real income abroad affect net trade
If real income abroad increases it wont have an effect on the amount of imports within the UK. However, customers overseas will purchase more UK goods, causing exports to increase and trade balance to strengthen
How does the strength of the UK pound effect net trade
WPIDEC
SPICED
strong pound makes imports cheaper weakening trade balance
Weak pound makes exports cheaper. Strengthening trade balance
How does the world economy effect net trade
If the world economy is booming people will have more money to spend on UK goods causing exports to increase. This makes trade balance strengthen
How does protectionism affect net trade
If protectionism measures are put in place on goods from abroad then the amount of imports will decrease as they are more expensive. Trade balance strengthens
