2.2.1-2 Flashcards
What is Aggregate demand?
The total level of spending in the economy at any given price.
What is Aggregate demand made up of?
- Consumption
- Investment
- Government spending
- net Exports (x-m)
What is consumption?
- Is consumer spending on goods and services which make up 60% of AD
What is investment?
- The spending by businesses on capital goods for example, new equipment and buildings as well as stocks and work in progress.
- makes 15-20% of AD
What is government spending?
- Spending by the government on providing goods and services.
- Generally public and merit goods both on wages and salaries of public sector workers.
- Roads, schools
- 18-20% of GDP
What is net exports?
- Is (exports - imports). When imports are higher than exports this is a minus figure a more money is going out than coming in.
- 5%
Explain the AD curve?
- Shows relationship between price level and real GDP.
- Is downward sloping as a rise in price calls a fall in real GDP.
Why is the AD curve downward sloping?
- Income effect (A rise in price is not straight way a rise in income. People have lower incomes making them spend less)
- Substitution effect (If prices in UK increase less foreign people will buy British exports and UK residents will want to buy imported goods. Rise in imports fall in exports causes AD to contract)
- Real balance effect (A rise in price means what people have saved up no longer worth as much. Therefore want to save more and reduce spending contraction in AD)
- Interest rate effect (Rising prices means firms have to pay workers more and more demand for money. IR increase as higher demand)
What causes a movement and shift across AD curve?
- Movements along AD curve is caused by change in prices cause by inflation or deflation.
- A shift in AD curve is caused by any other variable.
Why do interest rates cause a movement in AD curve?
When prices increase, interest rates increase. This causes a movement along AD curve but if the government increases interest rate than there is a shift in the AD curve.
- Always look wether the change is because of price
What is Consumption?
- Spending on consumer goods and services over a period of time
What is disposable income?
- (Y) The money consumers have left to spend after taxes and state benefits.It is affected by government taxation
Why is disposable income important?
- Most important factor in determining level of consumption.Those on higher wages will be able to spend more than those on minimum wages
What is MPC (Marginal propensity to consume)?
- To see how much an increase in income effects consumption
What does an MPC less than 1 mean?
- Increase in income increases spending but spending doesn’t increase as much as income.
Why will people have an MPC more than 1?
- They use borrowing or savings to fulfil the demand for goods which is higher than their increase in income.
Why will poorer people have a higher MPC?
- Likely to spend much more of their increase in income whilst rich people are more likely to save it
What is the APC (Average propensity to consume)?
- The average amount spent on consumption out of a total income.
In industrialised country the APC is likely to be less than one as people are more likely to save their earnings.
Formula for MPC?
- Change in consumption/change in income
Formula for APC?
- Total consumption/total income
What is the relationship between savings and Consumption?
- Savings is what is not spent out of income. Increase in consumption decreases savings so things that affect consumption affect savings and works other way.
what is the MPS (Marginal Propensity to save)?
- How much an increase in income is saved
What is the APS (Average propensity to save)?
- The average amount saved out of an income
Formula of MPS?
Change in savings/Change in income
Formula of APS?
Total savings/Total income
How does interest rates affect consumer spending?
- Most major spendings are bought on credit so interest rate will affect cost of good. If interest rates are high the price of good will be higher as need to be paid in more interests and this leads to a reduction in consumption.
How does consumer confidence affect consumer spending?
- What affects spending is what people think will happen in future. If people are confident they will get a higher pay wage in future they will increase spending. If they expect high inflation they will buy now increasing consumption.
- However if they think they’ll get unemployed or recession consumption will decrease.
How does wealth affects effect consumer spending?
- Wealth is a stock of assets. People with higher wealth will consume more. Change in consumption leads to a change in wealth.
- Experienced when home owners have more wealth when houses prices rise so they are confident with spending if they go into financial difficulty.
Explain how distribution of income effects consumer spending?
- Those on higher incomes will tend to save more compared to those on low incomes . So a change in distribution will affect level of consumption
How does tastes and attitudes effect consumer spending?
- In our society people have materialistic drive which encourages people to have newest and best things which causes an increase in consumer spending. And also opposite
What are things that effect consumer spending?
- Interest rates
- Consumer confidence
- Wealth effects
- Distribution of income
- Tastes and attitudes
