Aggregate Demand Flashcards
Define Aggregate demand
Aggregate demand is the total level of spending in an economy at any given price
What are the comments of AD
Consumption
Investment
Government Spending
Net trade
Why is AD downward sloping (increase in price causes a fall in RNO)
Income effect - rise in price does not mean rise in income
Substitution effect - if prices rise, d of X will fall, d of M will rise meaning fall in AD
Real balance effect - increase in price would make savings seem worth less so people will reduce spending
What causes a movement in AD
A change in price
What is consumption
It is the spending of consumers over a period of time
What is disposable income
It is the income people have left to spend after taxes
Who is more likely to have a higher MPC
Poorer people as rich people are more likely to save and invest
How do you calculate MPC
MPC = change in consumption / change in income
Factors that influence consumer spending
- Interest rates
- Consumer confidence
- Wealth effect (wealth is a stock of assets)
- distribution of income (higher income likely to save/invest)
Define investment
Investment is the addition of capital stock to the economy used to produce goods.
Why is investment in capital a sunk cost
As capital diminishes in value over time
What factors influence investment in an economy?
- rate of economic growth (accelerator effect)
- Business confidence (Animal spirits)
- Demand of exports (international competitiveness)
- interest rates
- regulations and government intervention
- access to credit
- retained profit
- technological change
Factors that influence government spending:
- position on trade cycle
- fiscal policy
- age distribution of population
- unemployment levels
Define net trade
It is the total net export - total net import
Factors that influence net trade balance:
- real incomes
- exchange rates
- state of the word economy (trading partners)
- degree of protectionism (tariffs, quotas, trade blocs)
- non price factors
