2.2 Aggregate Demand Flashcards
what is the definition of AD
the total demand for all G/S in an economy at any given average price level
equation for AD
C + I + G + (X-M)
what does it mean if AD increases
economic growth has occured
what is the definition of consumption
the total spending on G/S by consumers in an economy
what is the definition of investment
the total spending on capital goods by firms
what is the definition of government spending
the total spending by the government in the economy
what is the definition of net exports
the difference between the revenue gained from exports and the expenditure on imports
why is the AD curve downward sloping
the interest rate effect
the wealth effect
the exchange rate effect
what is the interest rate effect
at higher average price levels, there are likely to be higher interest rates. higher interest rates reduce investment and are an incentive for households to save
what is the wealth effect
as the average price level increases, the purchasing power of households decreases and AD falls
what is the exchange rate effect
SPICED (strong pound imports cheaper exports dearer) and WPIDEC (weak pound imports dearer exports cheaper)
what happens to the AD curve when there is a change in average price level
there is a movement along the AD curve
when does a shift in the AD curve occur
when there is a change in any of the determinants of AD
what is disposable income (RDY)
money that households have left over from their wages after they have paid direct taxes and received any subsidies/benefits
how do interest rates affect consumption
higher interest rates give a greater incentive to save and will increase mortgage payments, so there is less consumption
