2.3 the determinants of aggregate demand Flashcards
what are the components of aggregate demand
consumption (C) investment (I) government spending (G) exports (X) imports (M)
what is the formula for aggregate demand
AD = C+I+G+(X-M)
what are the determinants of consumption
level of income expected future income wealth consumer confidence availability of credit distribution of income - lower income have a higher propensity to spend
what is investment
expenditure that increases the capital stock of a country
what are the determinants of investment
interest rates future growth/ demand profitability government policies - tax and subsidies efficiency of the financial system
what are the two types of government spending
current spending - transfer payments like benefits and salaries
capital spending - long term spending that increases productive capacity of the economy like on infrastructure
what determines government spending
cost of borrowing fiscal deficit or debt targets levels of national debt state of the economy confidence in the economy political bias
determinants of exports and imports
exchange rate - determines relative price
quality of goods
domestic vs international prices
what are savings
the part of disposable income that is not spent
factors determining the level of spending
interest rates consumer confidence job security inflation expectations level of income, higher income have a higher propensity to save
what is the savings ratio
ration of savings to income
what is the acceleration process
it links growth in real income to a change in the rate of investment, an increase in real income causes firms confidence to rise, and to pre-empt high future demand, investment will b increase by more than the real income has risen. the inverse happens if real income falls, investment will fall by more showing how volatile it is
