aggregate demand Flashcards
graph of AD
downwards sloping demand curve
ad equation meaning
aggregate demand = consumption + investment+ government spending + (export - imports)
why does the AD curve slope down
- PL rising - interest rate usually rises as well - to maintain real rate of interest which otherwise would be distorted by inflation
- higher wages demanded by labour force - real wages fall as PL increases cet par = less purchasing power
- as PL higher, price of exports increases - less people likely to buy X - AD falls
what shifts AD?
changes in injections (I, X, G) or leakages (T, M, S)
YPD meaning
YPD - personal disposable income: gross income - direct tax = net income
net income - indirect tax = personal disposable income
= consumption + savings
keynesian consumption function
keynes argued that consumption is a function of personal disposable income
c=f(Ypd)
graph showing c=Ypd upwards sloping 45 degrees to Ypd (x axis) and C(y axis)
extra line y=a+bYpd
a = necessities
b = gradient
gradient of keynesian consumption function
b = marginal propensity to consume - constant according to keynes
marginal propensity to save - MPS
percentage likely for comsumers to spend vs save
mpc + mps = 1
calculated by change in saving/ change in income
marginal propensity to consume - MPC
percentage likely for comsumers to spend vs save
shown by gradient on y = a + bYpd
APS and APC
average propensity to save and average propensity to spend
apc + aps = 1
difference between marginal and average propensities
marginal - needs 2 numbers to measure a change
average - any point in time, one number needed, just total x/total y
low income apc/aps
low income people - do not have enough to fund necessities (a) so aps is negative and apc is over 1
called ‘dissaving’
high income apc/aps
apc significanly below 1 for high income earners (apc>mpc) so they are more likley to save
recent UK trends in consumption
- Covid - fall in consumption but compensated after covid by all the savings in covid, traveling
- as inflation rose, consumption fell as real incomes fell
- rising interest rates meant cost of money riased so people with loans lower Ypd so lower C
- high UE levels - lower C
- falling house prices - negative wealth effect - less consumption because less confidence
why do people save
- uncertainty - short tern uncertainty funds as precaution
- smooth consumption - save for the future and retirement to be able to keep consuming and maintianing lifestyle
factors influencing saving ratio
- wealth - higher wealth effect, less likley to save (example - houses, shares)
- interest rates - higher rates, higher reward for saving so more saving
- demographic - middle aged people likely to save more
- inflation - less likely to save if rising inflation - have lower real income
- culture - some cultures have different propensity to save
- uncertainty - expectations on economic outlook
- constraints - if they have to spend on something
