Aggregate Demand Flashcards
What is aggregate demand?
Aggregate Demand (AD) is the total level of spending in the economy at any given price
What are the components of aggregate demand?
Consumption
Investment
Government Spending
Net Exports
What is consumption in aggregate demand?
Consumption is consumer spending on goods and services; it makes up about 60% of AD
What is investment in aggregate demand?
Investment is spending by businesses on capital goods, such as new equipment and buildings. It makes up about 15-20% of AD and is mostly by private sector but there is also some by the government
What is government spending in aggregate demand?
Government spending is spending by the government on providing goods and services. This changes year by year as the government decides how much they spend. This tends to account for 18-20% of AD
What are net exports in aggregate demand?
Net exports is exports minus imports. The UK has a large trade deficit, but this minor figure is the least significant part of AD at around 5%
How does consumption effect aggregate demand?
Increases in household income means there is more expenditure and therefore a greater aggregate demand
How do interest rates effect aggregate demand?
As interest rates go down, the cost of borrowing for businesses decreases and so businesses do more loans and investment. This pushes up aggregate demand
How does government spending effect aggregate demand?
Ig government spending increases, more jobs are created with more government projects and so workers are employed, increasing GDP and therefore demand
How does net exports effect aggregate demand? How is this influenced by the currency?
When pound is depreciating, exports are cheaper, demand increases and imports decrease
When pound is appreciating, exports are more expensive, demand decreases an imports increase
How does the stock exchange relate to interest rate?
The stock prices and interest rate are inversely related
What does the AD curve show?
The AD curve shows the relationship between the price level and real GDP. It is downward sloping as a rise in price level causes a fall in GDP
Why does a rise in price level causes a fall in real GDP?
Income Effect: People have lower real incomes, so they can afford to by less leading to the downwards slope
Substitution Effect: Prices in the UK rise, so UK residents buy foreign imported goods, the rise in imports and fall of exports causes AD to contract
When does the AD curve shift or move?
The AD curve moves when there is a change in price level: inflation or deflation
There is a shift in AD when there is a change in any other variable: consumer spending, business investment, government spending, net exports
