7.3 The determinants of AD Flashcards
What is the shape of a normal demand curve?
What direction does it go?
Straight line, downwards sloping
What is price level?
the average of prices for all goods and services in an economy.
What is real national output? (RNO)
the output of the economy taking into account inflation.
How do you calculate real national output? (RNO)
Nominal National Output/Average Price Level
What is the equation for Aggregate Demand?
AD = C + I + G + (X-M)
What factors determine the level of consumption in a household? (6)
Income Interest rates Levels of personal debt Levels of personal wealth Confidence Marginal propensity to consume/save
What factors affect consumption? (not in household) (5)
Interest rates
Consumer confidence
Taxation
Wealth - wealth effects
Unemployment
In economics, any disposable household income that is not used for consumption is said to have been ______.
Saved
What are the factors that affect investments? (8)
Interest rates Confidence Government incentives Economic growth Profit levels Price of capital equipment Technology Tax
What is the accelerator effect?
shows the relationship between Gross Domestic Product (GDP) and the rate of investment
It states that a rise in GDP will lead to a proportionately larger increase in investment
What is the accelerator theory?
The accelerator theory of investment states that increases and decreases in the rate of growth of national income will lead to even larger increases in the level of investment. If growth in national income increases, then investment will also increase and vice versa
What does the government spend money on within the economy?
Public services
Local government services
Welfare expenditure
Interest on debt
How is government expenditure financed?
Through taxation. Government spending and taxation makeup balanced budget.
What does NET exports stand for?
(Exports – Imports) or (X-M)
Why do we do (Exports – Imports) or (X-M)?
We are only concerned with demand and output generated within a country, hence imports are deducted
What factors affect NET exports? (5)
Country productivity Exchange rates Ecconomic growth in other countries Extent of free trade Relative inflation
What happens when the AD curve shifts?
there is a change in any of the components of AD (C, I, G, X or M)
What happens when there’s a shift along the AD curve?
A change in the price level
What does a rise in price level mean for aggregate demand?
Contraction in AD
What does a fall in price level mean for aggregate demand?
An expansion in aggregate demand.
What does an increase in any of the components of AD do to the curve?
The AD curve will shift outwards.
What does an decrease in any of the components of AD do to the curve?
The AD curve will shift inwards.
What does a fall in price level mean for aggregate demand?
Expansion in AD
What is MPC?
Marginal propensity to consume
How do you calculate MPC?
MPC = change in consumption / change in income
What is the marginal propensity to consume (MPC)?
The marginal propensity to consume is the change in consumer spending due to a change in disposable income
What is MPS?
Marginal propensity to save
How do you calculate MPS?
MPS = change in savings / change in income
What is marginal propensity to save (MPS)?
The marginal propensity to save is the change in household saving resulting from a change in household disposable income
