27 Aggregate demand Flashcards

1
Q

Aggregate demand

A

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

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2
Q

Shifts in AD

A

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

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3
Q

Relationship between income and consumption

A
  • 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
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