Aggregate Demand Flashcards
Components of Aggregate Demand
Consumption
Investment
Government Expenditure
Net Exports (X-M)
AD = C + I + G + (X-M)
AD = GDP
Changes to consumption and impact on AD
Change in income
Change in interest rate
Change in wealth (house prices, value of stocks and shares
Changes in consumer confidence/expectations
Level of household indebtedness
Aggregate Demand
total spending on goods and services in a given period of time at a given price leve
x axis: real GDP
y axis: average price level
Components of AD
Consumption
Investment
Govt spending
Net exports (X-M)
AD = GDP if we consider the expenditure definition of GDP
Aggregate Demand
total spending on goods and services in a given period of time at a given price leve
x axis: real GDP
y axis: average price level
Components of AD
Consumption
Investment
Govt spending
Net exports (X-M)
AD = GDP if we consider the expenditure definition of GDP
Changes to Investment
Changes in interest rates - decrease yields less money invested
Changes in Business tax - decrease shifts AD right
Tech changes - increase shifts AD to right
Change in firm confidence
Level of corporate indebtedness
Changes in Govt spending
Increasing spending should increase AD as it encourages directly increases level of spending in an economy
Causes of changes in Net Exports (X-M)
Positive value of X-M = trade surplus
Change in level of exports - if level of foreign income rises, then increase of imports and consumption of foreign goods rises
Changes to exchange rate
Trade policy
Inflation rates - if inflation rates in producer country increase, those goods are less likely to be in high demand as price would be higher
Changes in level of imports
National income - if GDP rises, likely to be an increase in consumption of goods and services and thus imports
Exchange rates - stronger currency in importer country means that they will have cheaper imports
Trade policy
Inflation
