2.2: Aggregate Demand (AD) Flashcards
2.2 Includes: -2.2.1 The Characteristics of AD -2.2.2 Consumption (C) -2.2.3 Investment (I) -2.2.4 Government Expenditure (G) -2.2.5 Net Trade (X-M)
Equation for Aggregate Demand (AD)
AD = C + I + G + (X - M)
What is the C in AD formula
Consumption
What is the I in the AD formula
Investment
What is the G in the AD formula
Government Spending
What is the (X - M) in the AD formula
Exports - Imports
A.K.A The Balance of Trade
List:
Factors Affecting Consumption (AD)
- Inflation
- Interest rate
- Availability of credit
- Expectations/ consumer confidence
- Income (MPC)
- Wealth
If household income Inc., we expect consumption to inc.
The amount that this happens depends on the marginal ___________?
Marginal Propensity to Consume (MPC)
Usually between 0 and 1. If above 1, money must’ve been borrowed
Define:
Average Propensity to Consume (APC)
A measure of the average amount spent on consumption out of income
MPC Formula
MPC = (ΔConsumption/ ΔIncome)
APC Formula
APC = Consumption / Income
Two categories of wealth
- Physical Wealth
- Monetary Wealth
Define:
The Wealth Effect
The idea that when wealth increases, consumption will also increase
Explain:
Why does the wealth effect happen?
- There is increased confidence when you have more wealth, giving you the psychological effect of feeling richer; financial safetynet also provided
- Can sell or borrow against value of the asset (equity release)
- Increased incomes
Define
Investment (AD)
The purchase of capital goods which are then used to create other goods and services
Define
Gross Investment
Measures investment before depreciation is taken into account
Define
Net investment
Measures investment after depreciation has been taken into account.
List:
Factors affecting Investment
- Interest rates
- Rate of economic growth (& profits)
- Expectations/ confidence (animal spirits)
- Export demand
- Availability of credit
- Changes in technology
- Gov. regulations and taxes
List:
Factors affecting Exports and imports
- Prices
- Non-price factors
- Exchange rates
- State of world economy
- Protectionism
- Domestic incomes
