2.2.1 Aggregate Demand Flashcards
What is Aggregate demand?
Total level of planned real expenditure on goods and services produced within a country in a given time period
Whats the equation for Aggregate Demand?
C+I+G+(x-m)
What does component C stand for?
Household spending on goods and services
What does the component I mean
- Gross fixed capital investment spending (spending by businesses or governments on capital goods)
- Value of change in stocks (inventories)
What does component G stand for?
Government spending on public services
What does component X stand for?
Exports of goods and services
What does component M stand for?
Imports of goods and services
What is GDP in terms of expenditure?
The actual value of expenditure
Why are changes in AD key to understand?
They are key to understanding fluctuations in a cycle e.g. Recession and recovery, boom and slowdown stages
What causes a fall in AD?
-Fall in net exports (M>X)
-Cut in government spending (G)
-Higher interest rates
-Decline in household wealth and confidence
What causes an increase in AD?
-Depreciation if the exchange rate
-Cuts in direct and indirect taxes
-Increase in house prices
-Expansion of supply of credit + lower interest rates
What is a shock?
An unexpected event causing changes in demand, output and employment
What is a shock?
An unexpected event causing changes in demand, output and employment
What is an example of an external shock?
-A large rise or fall in the value of the exchange rate
-A recession in one or more of a nation’s key trading partners countries
-A global Financial Crisis
