Aggregate Demand Flashcards
What is Aggregate Demand
The total of all demands or expenditures in the economy at a given price level.
What are the sources of Aggregate Demand
Households
Firms
Foreigners
Government
What is the formula for AD
Consumption + Capital Investment + Goverment spendings + (Exports-Imports)
On an AD graph, what is on the X and Y axis
X= real income/real national output/Real GDP
Y=Price level
Why is an AD curve downwards sloping
-There is an inverse relationship between price level and national income
-Substitution effect
-Income effect
What is real income
How much of a good/service you can buy with a set income.
A country with increasing inflation rates are likely to see a decrese in exports unless:
They are selling high quality products
The purchasing country has a higher inflation rate
An increase in aggregate demand leads to
Economic growth
Lower unemployment
What causes a leftwards shift of AD
Decrese in consumption,investment,government spending,exports and a increase in imports
What is the formula for net investment
gross investment-depreciation
Define the wealth effect
When asset values rise (e.g. house/stock prices) people feel wealthier, they are more likely to spend, increasing consumption, increasing AD
When asset values fall (e.g. house/stock prices) people feel poorer, they are less likely to spend, decreasing consumption, decreasing AD
What does the savings ratio tell us and how do we calculate it
What % of DISPOSABLE income consumers will save
(Savings/disposable income)x100
A high savings ratio means that the AD curve will shift to the …
left
