Aggregate Demand Flashcards
Define Aggregate Demand
The planned level of spending on domestic output at different average price levels per period of time
Draw the AD curve
Look at the sheet/notes
What is the wealth effect?
If the average price level increases then the real value of the money that people have in their pockets or in bank accounts decreases. If people feel poorer they tend to spend less.
What is the trade effect?
If the APL increases then exports become less competitive abroad wile imports seem more attractive at home so net exports decrease
What is the interest rate effect?
If the APL increases, then people need to hold more money to buy the same goods and services. Demand for cash increases if the supply of money by the central bank is constant.
Define Interest rate
The cost of borrowing or the reward for saving money over a period of time expressed as a percentage
What are determinants of aggregate demand components?
- Consumption Expenditures
- Investment Expenditures
- Government Expenditures
- Net exports
How do consumption expenditures determine AD?
- Interest rates
- Consumer confidence
- .Household wealth
- Personal income taxes
- Household debtness
- Expectations of future price levels
How do investment expenditures influence aggregate demand?
- Interest rates
- Business confidence
- Technology
- Business taxes
- Corporate indebtedness
How do government expenditures influence aggregate demand?
- transfer payments
- capital spending
How do net exports influence aggregate demand?
- Income of trading partners
- Exchange rates
- Trade policies
Define consumer expenditures
Expenditures by households on durables, non-durables and services
Define consumer confidence
The degree of optimism or pessimism characterising households which affects their spending decisions
Define Investment expenditures
Spending by firms on capital goods
Define business confidence
Refers to the degree of optimism or pessimism that characterises business in a country
