aggregate demand Flashcards
aggregate demand
total of all demands or expenditures in the economy for any given price
components of aggregate demand
C + I + G + (X-M)
C - consumption
spending by households
I - investment
spending by firms on investment goods
X-M - Export - Import
foreigners spend money on goods produced in the domestic economy and vice versa
why is AD curve downward sloping
- shows diminishing marginal utility
- consider what happens to different components as price rises
- a rise in price level will lead to a fall in the equilibrium level of national income and there of national output.
influences of consumption (5)
- disposable income
- interest rates
- wealth effect
- consumer confidence
- level of welfare payments
wealth effect
a fall in real wealth will result in a fall in consumer spending
relationship between savings and consumption
- inverse relationship
- if you decide to save more,
it will directly lead to a decrease in (consumption) as there’s less disposable income available to spend.
causes of low savings ratio (3 good 1 bad)
- people are spending a larger portion of their disposable income.
- high consumer confidence
- easy access to credit
- limited investment opportunities.
impact of savings ratio on bop
A high national savings ratio can contribute to a current account surplus. This happens because people are saving more than they are spending, leading to a decrease in imports and potentially an increase in exports
influences of investment (3)
- rate of economic growth
- interest rates
- business confidence
government policy to promote investment -3
- tax relief
- subsidies
- reductions of rate of corporation tax
influences on government expenditure - 3
- correction of market failures
- fiscal policy
- level of economic activity
net trade balance and exchange rate
- rise in exchange rate is likely to lead to lower exports and other economies are discouraged from buying
- rises import
redistribution of income and consumption
mention keynesian theory of consumptions
accelerator effect and investment
- nation income rises
- demand rises
- in the long term, firms will start demanding more capital goods to produce consumer goods
fiscal policy
decisions about government spending, together with taxes and government borrowing are called the fiscal policy
effect of higher government spending
can boost total spending and thus effect unemployment rates, reducing spending can decrease inflation
budget deficit
budged surplus
spending > rev
rev > spending
