2.2 Aggregate Demand Flashcards
Aggregate Demand
Total demand for a country’s goods & services at a given price level at a given time period.
AD = C + I + G + (X-M)
Aggregate Demand = Consumer Spending + Investment Spending + Government Spending + Net Export Spending ( Exports -Imports )
Wealth Effect ( C )
Trade Effect (X-M)
Interest Effect CY(X-M) Lower rates boost AD, higher rates reduce AD
AD shifts when there is a change in C + I + G + (X-M) independent of the price level.
Marginal Propensity to Consume (MPC)
Meaning / Equation / Range
The proportion of additional income that is spent on consumption rather than saved.
MPC = ΔC / ΔY
ΔC = Change in Consumption
ΔY = Change in Income
MPC Range:
MPC = 1 → All extra income is spent.
MPC = 0 → All extra income is saved.
0 < MPC < 1 → Some income is saved, some spent.
Determinants Of Consumption
(Consumer Spending and Aggregate Demand)
AD = C̲ + I + G + (X-M)
1. Level of real disposable income - Income Tax
2. Intrest Rate / Availability Of Credit
3. Consumer Confidence ⮕ Job Prospects ⮕ Level Of Unemployment
4. Asset Prices
5. Household Indebtedness
Determinants of Savings
(Savings and Aggregate Demand)
AD = C̲ + I + G + (X-M)
1. Level of real disposable income
2. Intrest Rates
3. Consumer Confidence
4. Range / Trustworthiness of financial institutions
5. Tax Incentives e.g. ISA’s (Individual Savings Account)
6. Age Structure Of Population
Determinants of Investments
(Investment and Aggregate Demand)
AD = C + I̲ + G + (X-M)
1. Intrest Rates
2. Business Confidence ⮕ Expected Profits ⮕ Expected Demand in Economy
3. Corporation Tax ⮕ Retained Profits ⮃
4. Spare Capacity
5. Level Of Competition
6. Price of Capital
⮕ ACCELERATOR (The idea that investment levels are linked to changes in economic growth.)
Higher GDP Growth → More Investment
Lower GDP Growth → Less Investment
Determinants of Government Spending
(Government Spending and Aggregate Demand)
AD = C + I + G̲ + (X-M)
1. Current Spending e.g. Maintenence of public services and payment of public sector wages
2. Capital Spending e.g. Infrastructure Projects
3. Welfare Spending e.g. Benefits & Pensions
4. Debt Interest Payments
Budget Deficit: G > T in a fiscal year (Borrowing in one year)
Budget Surplus: G < T in a fiscal year
Nation Debt: Total stock of debt over time accumulation of budget deficits.
G = Government Spending
T = Taxation Revenues
Determinants of Net Exports (X-M)
Net Exports and Aggregate Demand
AD = C + I + G + (X̲-M̲)
1. Real Disposable Income earned abroad
2. Real Disposable Income earned at home
3. Strong Or Weak exchange rates ⮕ SPICED ⮕ WIDEC
4. Protechionisms at home or abroad
5. Relative Inflation Levels at home
⮕ SPICED = Strong Pound Imports Cheap Exports:
When a currency appreciates, imports become cheaper while exports become more expensive, potentially leading to a trade deficit.
⮕ WIDEC = Weak Import Dear Export Cheap:
When a currency depreciates, imports become more expensive while exports become cheaper, boosting exports and improving the trade balance.
