Aggregate Demand Flashcards
What is aggregate demand?
Total demand for all goods and services within an economy at any given price level over a period of time.
What is the AD formula?
C + I + G + (X-M)
What are the AD components?
Household spending on G and S (C)
Gross fixed capital investment spending (I)
Government Consumption (G)
Exports of G and S (X)
(minus) Imports of G and S (M)
What influences consumption?
Interest rates, Consumer confidence, Wealth effects, Disposable income, Levels of debt.
What is consumer confidence?
How comfortable a consumer feels when purchasing
What is disposable income?
Income after tax and benefits
What is an investment?
The spending on capital goods, such as new factories, improves FOP, injection into the circular flow of income.
What influences investment?
-The rate of economic growth
The faster the pace of economic growth, the sooner capital equipment will wear out or
require replacement, so investment increases
-Business expectations and confidence
If firms are confident in future economic prospects and the likelihood of consumption
increasing, they are more likely to invest in capital projects
-Keynes and ‘animal spirits’
John Maynard Keynes coined the term ‘animal spirits’ to refer to the collective mood of
investors
When this is strong, AD increases leading to greater capital investment
-Demand for exports
This will encourage firms to invest in capital assets in order to
increase capacity to meet demand
-Interest rates
Lower interest rates make investment projects less costly and
normally help to stimulate investment
-Access to credit
Businesses rely on financial institutions to provide access to credit.
The Business Bank was set up in 2012 to provide finance for
businesses. This was particularly significant as the Credit Crunch
severely hit the liquidity of UK businesses
What is the accelerator effect?
High demand = more spending = more supply capacity = bigger change in % change for demand
What is the accelerator formula?
I = a (Y1 - Y2)
What is government expenditure?
spending by the public sector on goods and services e.g education, healthcare etc.
What factors effect government expenditure?
Fiscal budget and Trade cycle
How will government spending be influenced in a recession (negative growth for 2 or more consecutive quarters)?
Economic growth will be negative and government spending will increase.
What are automatic stabilisers?(involve an evaluation)
Where the government will pay more in unemployment benefits to counter a fall in demand. However, government will receive less tax as unemployment has increased leading to a potential budget deficit.
