27 Aggregate demand Flashcards
Aggregate demand
AD=C+I+G+(X-M)
AD = the ability and willingness of all economic agents to spend in the economy
C = spending by households on goods and services
I = spending by firms on goods and services to be used in future education
G = spending by the government on goods and services
Net exports - exports - imports
Shifts in AD
Consumption - increase tax or people saving rather than spending decreases consumption
Investment - firms invest to increase ability to produce goods and services - depends on confidence and gov incentives
Government expenditure- depends on the objectives of the government and level of government intervention
Net exports - imports are greater than exports decreases AD vice versa
Relationship between income and consumption
- spend less than income - leakages of saving
- spend more than income - past savings or borrowing
- low-income households are likely to have high propensity to consume as they use most if not all on necessities
- high-income households are likely to have low propensity to consume as they have money left over after purchasing necessities