2.2.1 Components of Aggregate Demand Flashcards
define aggregate demand
the total planned expenditure on a country’s goods and services produced within an economy in a time period
which groups spend money (demand) on goods and services
- consumers
- producers
- government
- foreign consumers and producers
what are the four components of aggregate demand
consumption, investment, government spending, net exports
what is the significance of consumption to GDP
largest component of aggregate demand in UK (just over 65% of GDP) therefore most significant to economic growth
what is consumption
domestic household spending on goods and services
what is investment
spending by firms on capital
what is the significance of investment to GDP
accounts for around 15% of GDP in the UK per annum - smallest component of aggregate demand
what is the significance of government spending on GDP
accounts for around 22% of GDP in the UK per annum
what is the significance of net exports to aggregate demand
UK has a relatively large trade deficit, which reduces the value of AD
Net exports = Exports-Imports = -2%
what is the formula for AD
AD = C + I + G + (X-M)
what is real GDP
the total value of goods and services produced in an economy over a period of time adjusted for inflation
what is the general price level
average of prices for all goods and services in an economy
what is on the x axis on an AD curve
real GDP
what is on the y axis on an AD curve
GPL
what are the three reasons for an AD curve being downward sloping
the real balance effect
the trade effect
the interest rate effect
describe the real balance effect
higher GPL, reduces real income, lower purchasing power (can buy fewer goods and services), total demand for goods and services falls
describe the trade effect
higher GPL, exports more expensive so less attractive to foreign consumers, lower net exports, lower spending on goods and services
what are interest rates
the cost of borrowing money, the reward for saving money and the return for lending money
what do the central bank do when inflation is rising
increase interest rates to try and reduce demand
describe the interest rate effect
higher GPL - interest rates rise (policy response),
lower consumption as household mortgage payments rise so less income left over, lower consumption and investment as borrowing is more expensive, lower spending
What is movement along the demand curve caused by
A change in price level, caused in a shift in the AS curve
What does a rise in price level lead to
A contraction in AD
What does a fall in the price level lead to
Expansion in AD
What leads to a shift in AD
A change in the components of AD (consumption, investment, government spending, net exports)
