Aggregate Demand Flashcards
What is aggregate demand?
The total demand for goods and services within an economy at a given time and price
What does aggregate demand measure?
It measures spending on goods and services by consumers, firms, the government and overseas consumers and firms
What is the equation for aggregate demand?
C + I + G + (X-M)
Why do we care about AD AND AS
They determine how the economy performs (at the macro level)
What is consumer spending?
How much consumers spend on goods and services
What is investment?
This is business spending on capital goods
What is government spending?
This is how much the government spends on state goods and services
What is X - M?
Exports - imports
This is the value of the current account on the balance of payments
What causes movement along the AD curve
A change in the price level
What does an increase in price level show?
Inflation
What does a decrease in price level show?
Disinflation or deflation
What does an increase in GDP mean?
An increase in GDP will lead to positive economic growth, lower unemployment, a current account moving into surplus and an overall boom
What does a decrease in GDP mean?
A decrease in GDP will lead to negative economic growth, higher unemployment, a current account moving into deficit and an overall recession
What causes a shift in AD?
It is caused by a change in the determinants of aggregate demand
What does a shift to the right mean?
It means that AD increases
What does a shift to the left mean?
It means that AD decreases
What causes a rise in AD?
- Rise in exports (X>M)
- Depreciation in the value of the exchange rate (WPIDEC)
- Cuts in the rate of direct and indirect taxes
- More supply of credit being given out by creditor
- Lower interest rates
What causes a fall in AD
- Fall in exports (X<M)
- Appreciation in the value of the exchange rate (SPICED)
- Decrease in government spending
- Higher interest rates
- Fall in the supply of credit
- Decline in household wealth and confidence
