6) Aggregate Demand Flashcards
What does AD mean
⚫️sum of spending
➡️in goods and services
➡️in an economy
➡️over a period of time
⚫️AD=(C)+(I)+(G)+(x-m)
What does consumption mean
⚫️total spending
➡️of UK households
➡️on goods and services
➡️for their own private use
What are the factors which may cause consumption to increase
⚫️interest rates decreases
⚫️income tax decreases
⚫️savings ratio decreases
⚫️unemployment decreases
➡️increasing consumers confidence
⚫️real income increase
⚫️positive wealth effect
➡️rising asset price
➡️individual feel more wealthy
➡️so consume more
What are the two evaluation of consumption as a component of AD
⚫️largest component of AD
➡️2/3rd of AD in the UK
⚫️main reason for economic growth
➡️in the UK
➡️between 1997 to 2007
➡️due to positive wealth effect
⚫️rising house prices
➡️encouraged individuals to take out loans
➡️based on the increased value of their property
What does savings mean
⚫️the proportion of income not spent on
➡️consumption
➡️imports
➡️taken in taxation
Why do people save?
⚫️precautionary reasons
⚫️building up potential spending power
⚫️interest rates
⚫️life-cycle reasons
Why do people save because of precautionary reasons
⚫️fear of being redundant
➡️important during recession time
Why do people save to build up potential spending power
⚫️to finance major spending commitment
➡️in the future
➡️car, wedding
Why do people save because of interest rates
⚫️greater incentives to save
➡️because of high interest rates from
➡️banks
➡️building societies
➡️other financial institutions
Why do people save for life-cycle reasons
⚫️younger people need money to
➡️fund their university education
➡️purchase a property
➡️expensive consumer goods
⚫️as people grow older ➡️income rise ➡️spending commitment decline ➡️as children leave home ➡️leading to increase in saving ➡️for retirement
What does household saving ratio mean
⚫️level of households savings
➡️as a percentage of
➡️household disposable income
What happens to the saving ratio during recession
⚫️increases
➡️due to fear of unemployment
What happens to the saving ratio during boom
⚫️decrease
➡️due to increase in
➡️consumer confidence
➡️spending
What does investment mean
⚫️spending on capital goods
➡️by businesses
➡️factories and machinery
➡️creates future production capacity
What are the factors which causes investment to increase
⚫️interest rates decreases
⚫️corporation tax decrease
⚫️consumer demand increases
⚫️business confidence increase
➡️about future consumer demands
What are the two evaluation of investment
⚫️Even-though investment ➡️only 20% of AD ➡️fluctuates a lot ➡️depending on businesses confidence ➡️on future sales
⚫️short run
➡️AD increases
➡️impacts on Real GDP
⚫️long run
➡️more lasting impact
➡️expands future productive capacity
➡️AS and PPF shifts to the right
What does the accelerator effect mean
⚫️proportionately bigger effect on investment
➡️likely to be caused by a change in AD
Describe the accelerator effect when the economy is growing quickly and consumer demand is high
⚫️investment increases ➡️due to firms ➡️being confident about the future ➡️so they purchase capital goods ➡️to meet expected future demands ➡️shifts AD right ➡️increase in investment ➡️increase in productive capacity
What is the effect of the accelerator when the economy is slowing down
⚫️reduces consumer demand
➡️excess capacity
➡️lead to decrease in investment
What does government spending mean
⚫️spending by
➡️government departments and local councils
➡️on goods and services
➡️like schools and hospitals
What does government spending not include and why
⚫️Benefits payments
➡️such as JSA and pensions
➡️they’re transfer payments to consumers
➡️counted as consumption
What are the factors which may cause government spending
⚫️objectives of the government in power ➡️e.g labour party ➡️spend more overall ➡️than conservative party ➡️when its in power
⚫️current economic situation ➡️e.g the current government ➡️reducing ➡️government debt ➡️and budget deficit ➡️therefore government spending is being cut overall
What is the 3 evaluation of government spending
✅ creates long term benefits
➡️by improving quality of factors of production
➡️e.g spending on education and health care
❎if government spend too much
➡️raises taxes
❎spending plan ➡️only changes ➡️once a year in the budget ➡️must be approved ➡️by a vote of all MPs in the parliament
What does net exports mean
➡️the value of exports minus the value of imports
Describe the net exports
⚫️exports
➡️injection to circular flow
➡️foreigners spending on
➡️UK goods and services
⚫️imports
➡️leakage from circular flow
➡spending by UK people
➡️on overseas economies
Why might exports increase
⚫️depreciate in the value of £
➡️making our goods and services
➡️cheaper overseas
⚫️increase in the UK productivity
➡️reducing business cost
⚫️growth in consumer demand
➡️in overseas markets
Why might imports increase
⚫️increase in uk consumer demand
⚫️high level of UK inflation
➡️making imports from other countries
➡️look cheaper
⚫️increase in the value of pound
➡️making imports look cheaper
What is the evaluation of net exports
⚫️uk is a very open economy
➡️buying in a lot of imports
➡️and selling a lot of exports
➡️therefore trade is very important for our economy
⚫️UK runs a large trade deficit
➡️so (x-m)
➡️is negative in AD in the UK
