2.2.1- The Characteristics Of AD Flashcards
What is aggregate demand?
The total level of spending in the economy
What is the formula for AD?
AD= C+ I+ G+ (X-M)
What is consumption?
Consumer spending on goods and services
How much of AD is consumption?
60%
What is investment?
Spending by businesses on capital goods
How much of AD is investment?
15-20%
Who is most of investment by?
The private sector (around 75%), but there is also investment by the government
What is government spending?
How much the government spends on state goods and services
How much of GDP is government spending?
18-20%
What isn’t included in the figure for government spending?
Transfer payments
What is the least significant part of AD?
Net exports at around 5%
What are the reasons for a downward slope on the AD curve?
-income effect
-substitution effect
-real balance effect
-interest rate effect
What is the income effect?
As a rise in prices isn’t matched straight away by a rise in income, people have lower real incomes so can afford to buy less
What is the substitution effect?
If UK prices rise, less foreigners will want to buy British exports and more UK residents will want to buy imported foregoing goods as they are cheaper, reducing net exports
What is the real balance effect?
A rise in prices means savings will be worth less, so people will want to save more and reduce their spending, reducing AD
