Aggregate Demand Flashcards
Aggregate Demand
The total level of planned real spending on goods and services in the economy over a period of time
AD equation
AD = C + I + G + (X - M)
Why the AD curve is downward sloping
Higher prices:
cause a fall in the purchasing power of money - fixed income + higher prices means people can’t buy as many goods and services
will make the UK less price competitive - foreigners buy less British exports and British people buy more imports instead of domestic goods
tend to drive interest rates up - British people buy less goods and services especially less consumer durables + Big Ticket Items (cars, computers)
Shifts of the AD curve
Outward: when any one of C,G,I,(X-M) increases
Inward: when any one of C,G,I,(X-M) decreases
Marginal Propensity to Consume (MPC)
The proportion of a change in income that is spent
MPC equation
change in consumption / change in income
Marginal Propensity to Save (MPS)
The proportion of a change in income that is saved
MPS equation
change in saving / change in income
Average Propensity to Consume (APC)
The proportion of total income that is spent
APC equation
consumption / total income
Effect of a cut in NI on the AD curve
Shift outwards
Effect of fall in consumer confidence on the AD curve
Shift inwards
Effect of a rise in the savings ratio on the AD curve
Shift inwards
Effect of a rise in interest rates on the AD curve
Shift inwards
Effect of a fall in house prices on the AD curve
Shift inwards
