2.2 Aggregate Demand Flashcards
What is Aggregate Demand?
The total level of spending in an economy in a time period.
What are the components of Aggregate Demand?
Consumption, Investment, Government Spending, Net Exports
What is consumption?
Consumer spending on goods and services, it makes up about 60% of AD
What is Investment?
Firm spending on capital goods, and other factors of production. It makes up about 20% of AD
What is government spending?
It is the money the government uses to provide public goods and services, and to maximize social welfare. It makes up about 20% of AD
What is net exports?
It is Exports - Imports. It makes up 2% of AD
What are the four reasons why the AD curve slopes downwards?
Income effect
Substitution effect
Real Balance effect
Interest Rate effect
What is the income effect?
When prices rise, they will not be matched by a rise in real incomes, therefore it will cause a fall in consumption and therefore lead to a contraction in AD.
What is the substitution effect?
When price level rises, foreigners will buy less UK exports and consumers will also buy less UK goods and will import more therefore causing net trade to fall therefore AD falling.
What is the Real Balance effect?
When prices rise, the amount of savings consumers have will be worth less, therefore they will consume less and save more so AD will fall.
What is the interest rate effect?
When prices rise, firms have to pay their workers more therefore the demand for money increases so the interest rate increases. This incentives consumption and causes AD to fall.
What is disposable income?
It is the income consumers have left after taxes have been taken away and welfare benefits have been added.
What is the marginal propensity to consume?
The proportion of added income spent on consumption
What are the 9 factors which affect Investment?
Access to credit
Government Policy
interest Rates
Animal Spirits
Export Demand
Trading Pattterns
Retained profit
Technological Changes
Costs
What are the 3 factors affecting government spending?
Trade Cycle
Fiscal Policy
Population demographics
What are the 5 factors which affect net trade?
Exchange rates
Degree of Protectionism
State of the World Economy
Prices
Non Price Factors
