Aggregate Demand Flashcards
What is the Equation for AD?
AD = C+I+G + (X-M)
What is the largest component and smallest component?
- Consumption 65%
- Govt spending 22.5%
- Public and Private sector investment just under 15%
What is the Wealth Effect?
- Changes in PL affect real value of peoples wealth
- If PL increases, real value of wealth falls
- People cut back on spending
What is the International Trade Effect?
- If domestic PL rises and other countries PL stays the same exports become more expensive
- We import more therefore trade deficit
What is the interest rate effect?
- increase in PL would mean ppl need to borrow more to afford shit
- Increase in demand for money and therefore increase in interest rate
- Decrease in borrowing
How does change in consumer confidence affect consumption?
- If consumer expect income rise they are optimistic to spend more
- Low consumer confidence due to fears, e.g cuts in wages, leads to less spending
How do change in interest rates affect AD?
- Spending is influenced by this
- don’t be a spastic
How do changes in wealth affect AD?
- Increase in consumer wealth makes them feel wealthier
- Likely to spend more
How do changes in personal income taxes affect AD?
- If government increase personal income tax then less disposable income
- Spending drops
Changes of household levels of indebtedness
- more debt people are likely to cut back on spending
What is the difference between gross investment and net investment?
- Gross investment is before capital depreciation
- Net investment is gross investment - the value of depreciation
How does business confidence affect AD?
- More confidence in future will mean more investment
How do changes in interest rates affect AD?
- Raise cost or lower cost of borrowing, determining factor of investment
How do improvements in technology affect AD?
- New tech stimulates investment and increases AD
How does level of corporate indebtedness affect AD?
- More debt means they are less inclined to buy/borrow anything
