2.2 Aggregate demand Flashcards
What is aggregate demand? (what else can it be called)
Can also be called total spending.
Total level of real expenditure on goods and services within a country.
What are the components of aggregate demand?
(C) total household expenditure on goods and services
(I) gross fixed capital investment spending by businesses
(G) government consumption
(x) exports of goods and services
(m) exports of goods and services
What is the formula for aggregate demand?
c+I+g+(x-m)
What is the biggest component of aggregate demand and what percentage is this?
consumption (65%)
What are the two axis of an aggregate demand curve?
what axis are each of them on
Real GDP (x axis) Y1,Y2,Y3 General price level (y axis) GP1,GP2,GP3
Draw an aggregate demand curve?
See notes in folder.
What are the two transformations that can happen to an aggregate demand curve?
(what are these caused by)
Movement along the curve (change in general price level)
shift along the curve (change in Aggregate demand)
What are the two scenarios that would cause a movement on the AD curve?
when the general price level decreases and income stays the same there is an extension in aggregate demand.
when the price level increases and income stays the same there is a contraction in aggregate demand.
What are the two scenarios that would cause a shift of the AD curve?
An increase in aggregate demand would cause an outward shift of the curve.
A decrease in aggregate demand would cause a inward shift of the curve.
What should happen when drawing diagrams?
A- axis labelled
C- curve labelled
E- equilibrium
What is real disposable income?
What happens when real disposable income increases?
Income adjusted for inflation tax deducted and benefits added.
Consumption increases.
What is Average propensity to consume? (APC)
Proportion of income that is spent. Income that is spent/total income x 100
What is marginal propensity to consume? (MPC)
The change in consumer spending following a change in income.
What is the relationship between savings and consumption?
Between savings and average propensity to consume?
if saving increases consumption will decrease.
If savings increase average propensity to consume will decrease.
What is savings ratio?
Total money saved/ total income x 100 is a percentage .
What is the impact of high interest rates on consumption?
Cost of borrowing will increase so less people will buy on credit.
Reward for saving so savings ratio will increase.
Repayment on loans increases so less money will be spent on consumption.
What are the two factors that can impact consumption?
2.2 consumption
- UK consumer confidence
- Wealth effects
What is UK consumer confidence and how does it work?
2.2 consumption
Consumer confidence is how optimistic households feel about the future.
Feelings about the future directly impact consumption.
When confidence is low consumption falls as households
save their money.
1-What are wealth effects? (how does income compare to this)
2- How does this impact consumption? (both ways)
1-Wealth is a stock concept. Stock of all assets owned by a household or individual.
Income is a concept of (flow concept).
2- If the value of assets decrease this could cause the level of consumption to decrease. If the value of assets increase individuals feel wealthier and consumption may increase.
What factors would increase consumption?
An increase in real disposable income A decrease in the savings ratio A decrease in interest rates an increase in consumer confidence An increase in asset price wealth affects
2.2.3 What is gross investment?
All spending on fixed capital.
2.2.3 What is depreciation?
the rate at which capital loses its value due to wear and tear. Becoming obsolete.
2.2.3 what is net investment?
Net investment= gross investment- depreciation
2.2.3 When is investment suitable?
Investment is only logical if the business if already allocating all resources efficiently.
2.2.3 What factors affect investment?
1-The rate of economic growth/ economic cycle.
2-Business expectations and consumer confidence.
3- demand for exports
4- interest rates
5- access to credit
6- the influence of government policies and regulations
2.2.4 What is (G) and what does it mean?
Government expenditure is the government spending on public goods and services such as NHS and Education.
2.2.4 What are the 2 factors that influence (G)
Trade cycle- economic cycle
Fiscal policy- use of government budget
2.2.4 What are the two situations a government can have with budget?
Deficit is when taxation is less than gov spending tg
2.2.4 What is gov budget
What is national debt
Gov budget is a flow concept.
National debt- total accumulation of gov debt= stock concept.
How can the trade cycle impact government spending?
In recession:
People suffer with depression or obesity so puts more pressure on NHS. (more spending needed)
People pull out children from private schools. (Puts strain on public schools)
People are made redundant so disposable income will decrease so gov will have to make up for this.
What is fiscal policy?
What are the two types?
Government spending and taxation.
Expansionary fiscal policy (deficit) g>t
Contractionary fiscal policy (surplus) t>g
What is net trade?
The element of aggregate demand that take into account exports- imports.
What are the factors on net trade?
Real income, Exchange rates, State of the world economy, degree of protectionism, Non price factors,
What are exports?
What are the factors effecting the demand for a nations
Exports are goods and services sold to other countries. Exports are an injection into the circular flow of income and spending.
Relative prices of exports in world markets.
The exchange rate, a stronger currency makes exports more expensive.
Non price demand factors.
Strength of aggregate demand in key export markets.
How is the net trade balance measured?
What is a trade deficit and what impact does it have?
What is trade surplus and what impact does it have?
Value of exported goods and services - value of imported goods and services.
Trade deficit imports> exports causes ad to fall
Trade surplus exports> imports causes ad to rise.
How does Real income impact “net trade”.?
If real income increases consumers will buy more imports, This will cause net trade trade to fall and cause to AD to decrease as M> X
How to exchange rates impact “net trade”.?
If the currency appreciates the exports will be more expensive for other countries so volume if imports will increase.
In addition an appreciation in currency makes the exports look imports look cheaper in domestic currency.
So the volumes of imports will increase.
How does protectionism impact “net trade”?
Protectionism is when countries put barriers to trade such a tariffs and quotas in place. (tariffs are a tax on exports).
This decreases the amount amount of exports the UK can sell, so net trade decreases and AD falls.
How does the state of the world economy impact “net trade”?
If there is a global recession then exports will decrease this means net trade decreases and AD decreases.
How do Non- price factors impact “net trade”?
If the quality of goods produced in the UK increases then exports will increase, so net trade will rise and AD will rise.
Interest rates rising will cause what component in AD?
What impact ±.
Consumption and investment.
AD will fall.
Consumer confidence falling will cause what component in AD?
What impact ±.
Consumption will decrease.
Exchange rates appreciates will cause what component in AD?
What impact ±.
Exports would decrease and imports would increase so net trade will be negative so AD will fall.
Negative economic growth will cause what component in AD?
What impact ±.
Consumption would decrease as
Government spending would increase so AD would increase.
Investment would decrease so AD would fall.
Imports would decrease.
In Jan 2021 tariffs on UK exports to beef to the EU will be 30% how would this cause AD
tariff on UK exports of beef to the UK wil be 30% Tariff price increases for exports. Less alternative to foreign countries. Don't buy from uk Exports falls Net trade falls. AD falls.
