Aggregate Demand Flashcards
what is consumption
total spending by households on goods and services
what percentage of AD is consumption
60%
what is the relationship between savings and consumption
inverse
how does income influence consumption
If disposable income increases then consumption will rise
what is disposable income
income after tax
how do interest rates influence consumption
higher rates lead to more saving and less consumption
how does consumer confidence influence consumption
When consumers are more financially confident in economy they will spend more.
how does the wealth effect influence consumption
A rise in wealth which is value of peoples assets leads to increase in confidence and spending
How does tax influence consumption
increase in tax causes people to have less disposable income or spending to cost more so consumption will fall
how does unemployment affect consumption
rise in unemployment will cause people to have less disposable income so consumption would drop
how does inflation influence consumption
short run expectation for inflation causes consumption to increase.
what percentage of AD is investment
15%
what is the difference between gross and net investment
gross is all investment but net is only that which increases productive capacity
what is capital investment
spending on capital goods like labour or new buildings and equipment
how does risk affect investment
high risk in economic instability or low confidence leads to low investment
how do government incentives influence investment
increase in subsidies or reduction in corp tax may result in increases investment
how do interest rates and credit availability affect investment
low rates of interest and high CA make borrowing for firms easier so investment will increase
how do technological advancements influence investment
new technology increases investment as firms aim to stay up to date with tech
accelerator theory
investment increases when demand or income increases
animal spirits
Keynes idea that investments aren’t always rational as they can be based on emotion and instinct
how does high demand for exports and high growth lead to increase in investment
provide supernormal profits for businesses which is used as retained profit and reinvested
what percentage of aggregate demand is gov spending
30%
what is not included in gov spending in AD
benefits and pensions
how does a recession affect gov spending
government will overspend causing a deficit to stimulate growth and increase AD
