2.2 aggregate demand - definitions

Question 1

Aggregate Demand (AD)

Answer 1

The total value of planned expenditure (spending) in an economy over a period of time. Formula: AD=C+I+G+(X-M).

Question 2

Consumption (C)

Answer 2

Total planned household expenditure on goods and services. All spending by consumers.

Question 3

Investment (I)

Answer 3

Spending by firms on capital goods, used to increase their future production; or additions to the stock of capital goods.

Question 4

Government Expenditure (G)

Answer 4

Spending by Government on Goods and Services (The NHS, Education, Defence etc.).

Question 5

Net Trade
(X-M)

Answer 5

Exports minus Imports. The same as the Balance of Trade.

Question 6

The Consumption function

Answer 6

The relationship between Real Incomes and Household consumption. As incomes rise, spending rises.

Question 7

Average Propensity to Consume (APC)

Answer 7

An overall measure of the proportion of income households devote to consumption.

Question 8

Marginal Propensity to Consume (MPC)

Answer 8

This is a measure of how much (the proportion or percentage) of any increase in household incomes is consumed or spent.

Question 9

Marginal Propensity of withdrawals

Answer 9

A measure of how much any increase in household incomes is saved, taxed by Government or spent on imports from abroad.

Question 10

Interest rates

Answer 10

The ‘price’ of money. What you must pay to borrow, or what you earn when you lend money.

Question 11

Wealth

Answer 11

The value of assets held by a person or a household. This is a stock – whereas income is a flow.

Question 12

Wealth effects

Answer 12

The effect on a household’s consumption when your wealth rises or falls. When you have more wealth you will spend more.

Question 13

consumer confidence

Answer 13

A measure of how confident households feel about the economy. Higher consumer confidence usually leads to higher consumption.

Question 14

Gross Investment

Answer 14

This is the total investment without any adjustment for depreciation.

Question 15

Depreciation

Answer 15

Over time, capital stock becomes old and machines wear out

Question 16

Net Investment

Answer 16

Investment adjusted for capital depreciation (minus depreciation)

Question 17

The accelerator

Answer 17

A change in investment will change the level of Aggregate Demand. But a change in Demand will also change investment.

Question 18

Business expectations

Answer 18

What firms expect to happen in the economy – when firms think the economy will grow in future they are more likely to invest more

Question 19

Keynes’ ‘Animal Spirits’

Answer 19

John Maynard Keynes’ theory that business confidence is random and unpredictable.

Question 20

Public Expenditure

Answer 20

Spending by central and local Government – health, education, transport, police, defence etc.

Question 21

Government revenue

Answer 21

Money raised to pay for public expenditure through taxation.

Question 22

Fiscal Policy

Answer 22

Policies that change the level of Government spending, taxation or borrowing in order to manage the level of Aggregate Demand

Question 23

Budget Surplus

Answer 23

Where Tax revenue exceeds public expenditure

Question 24

Budget Deficit or PSBR / PSNB

Answer 24

Where Public expenditure exceeds tax revenue – Government borrowing.

Question 25

Exchange rates

Answer 25

The price of one currency in terms of another. For example, the value at which you can change £s for $s.

Question 26

International Competitiveness

Answer 26

A measure of how competitive your goods and services are compared to those from other countries .

Question 27

Non-price factors

Answer 27

Factors aside from the price of a good or service which affect its competitiveness e.g. quality, branding, craftsmanship.

Question 28

Protectionism

Answer 28

Measures countries use to protect their own firms/workers from competitiveness goods or services made abroad. Most common forms of protectionism are tariff, quotas & regulations.