Aggregate Demand Flashcards
What is AD?
The demand for all goods + services in an economy added up
What is the equation for AD?
AD = C+I+G+(X-M)
What are the average percentages for each component of AD?
Consumption = 70%
Investment = 14%
Government spending = 25%
Exports and imports = 1%
What is gross investment?
Refers to the total amount of the original investment
What is net investment?
Refers to the total minus any deductions
What is the formula for net investment?
Net investment = gross investment - depreciation
What is the multiplier effect?
Where an initial increase in injections leads to a larger increase in aggregate demand
What is disposable income?
Income minus taxes
What is the multiplier ratio?
1/1-MPC
What does the multiplier ration show?
How much GDP will increase in total following an initial injection into the economy
Formula for marginal propensity to consume?
MPC = Change in Consumption / Change in Income
What marginal propensity to consume?
How much consumer will spend when given additional pounds
Formula for marginal propensity to withdraw
MPW = 1 - MPC
