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
