2.2.1 - 2.2.5 aggregate demand Flashcards
components of AD
consumption
investment
gov spending
net exports
two flows in flow of income
physical flow - real things
monetary flow- money that pays for the physical things
economy’s circular flow of income come in the form of …
injections- form of exports, investment, gov spending
withdrawals- imports, savings, taxes
if injections into the circular flow are greater than withdrawals then
means expenditure is greater than outputs
if withdrawals from circular flow are greater than injections then
output is greater than expenditure
multiplier effect
the actual change in the national income is greater than the initial injection
aggregate demand def
the total demand of total spending in an economy over a given period of time
aggregate demand formula
consumption (C)+ investment (I) + government spending (G) + (export (X) - imports (M))
consumption definition
total amount spent by households on goods and services. it doesn’t include spending by firms.
main factors affecting consumption and saving
. income- disposable income increases C increases
. interest rates- higher interest rates lead to less c spending
. consumer confidence- more confident abt economy more spending
. wealth effects- rise in wealth
. taxes- direct increases decrease C
. unemployment- unemployment rises decrease C
diff between saving and investment
saving tends to be made by households and investment tend to be made by firms
investment definition
money spent by firms on assets which they’ll use to produce goods or services ( ex- machinery )
gross investment def
includes all investment spending
net investment def
only includes investment that increases productive capacity ( 3 old trucks but replaces w 5 old trucks net investment is 2)
how much c makes up AD and how much I makes up AD in uk
c- 66%
I- 15%
factors that affect investment
.risk- high risk less inventing
. gov incentive + regulation- ex subsidies increase investment, relax gov reg increase investing
. interest rates + access to credit- higher interest rates decrease investing,
. technical advances- invest in new tech increase investment
. business confidence- higher confidence higher investing
business confidence def
ability to make profits
which depends general optimism or pessimism of business
keynes recognised not all investment based on rational thinking other factors included + what they’re called
called - animal spirit
. human emotion
. intuition
. gut instinct
gov spending def
the money spent by the government on public goods and services
what is not included in gov spending
transfer of money is not included- only money that directly contributes to the output of the economy is included
if gov spending greater/ less than its rev there will be a
- budget deficit (g)
- budget surplus (lt)
what might a gov do if economic growth is slow and demand is low
overspend to increase AD
exports def
goods and services that are produced in one country then sold in another
imports def
goods and services produced elsewhere and brought into a country
factors that affect imports and exports
.exchange rate- in long run value of currency increases imports become cheaper. short run ex/imports both price inelastic ,,won’t change much
. changes in state of world economy-higher real income higher imports
. degree of protectionism- short run tariffs and quotas can increase net exports by reducing imports but long run countries may retaliate and introduce own tariffs
. non price factors- quality of goods
aggregate demand curve x axis and y axis
x- real national output
y- price level
what causes movement along AD curve
price level
rise in price level will cause output to fall because
. decrease domestic consumption
. decreased demand for exports
. increase demand for imports
what may cause AD curve to shift to the right
. rise in consumption
. rise in gov spending
. rise in investment
. rise in net exports
. reduction in income tax
. gov changes fiscal policy
. weak currency (exports cheaper imports more expensive)
. increase labour
( price remains the same)
what shifts AD curve to the left
. fall in consumption
. fall in investment
.fall in gov spending
. fall in net exports
. rise in interest rates
. strong currency increases imports decreased exports ( cheaper imports)
. decrease labour
. increase unemployment
multiplier does what to AD
leads to a larger increase in AD
average propensity to consume (APC) formula
consumption/ total income
average propensity to save (APS)
amount saved / total income
marginal propensity to consume (MPC) def
the proportion of any extra income that’s spent on consumption of goods and services
marginal propensity to save (MPS) def
the proportion of extra income that’s saved
MPC formula
change in consumption/ change in income
MPS formula
change in saving/ change in income
what happens to multiplier effect if in MPC is low
then multiplier effect is small
calculate multiplier from MPC
1/1-MPC
marginal propensity to withdraw is
the proportion of any new income that’s withdrawn from the economy
ways extra income can be with drawn
. saved
. paid to the gov on taxes
. uses to import goods from abroad
marginal propensity to tax is (MPT)
the proportion of any new income that’s paid as taxes
marginal propensity to import MPM is
the proportion of any new income that’s used to import goods
how to calculate multiplier from MPW
1/MPW
multiplier will be … if marginal tax rates are low
big bc low MPW ,, multiplier is big
trade balance def
value of exports - value of imports
