Aggregate Demand Flashcards
What are the 3 reasons for the aggregate demand curve to be downward sloping?
Real wealth effect
Interest rate effect
Exchange rate effect
What is the real wealth effect?
Lower price causes more consumers to buy and vice versa
What is the interest rate effect?
Higher interest rates = less investment
What is the exchange rate effect?
Higher value of money (exchange rate) causes cheaper imports and less countries buy your exports
What is aggregate demand?
Total demand of all goods and services in an economy
What 4 things shift the aggregate demand curve?
Consumer spending/Consumption (C)
Investment spending (I)
Government spending (G)
Net exports (X-M)
What is consumption?
Total spending by households in goods and services in an economy
What can affect consumption (not price level)?
Level of real disposable income
What can cause a higher marginal propensity to consume?
Expecting promotion
Low level of unemployment
Feeling more wealthy (higher asset prices)…
What is disposable income?
Money that consumers have left to spend (after taxes)
What is the formula for marginal propensity to consume?
Consumption
———————
Change in income
What influences consumer spending?
Interest rates
Consumer confidence
Wealth effects
Distribution of income
Tastes and attitudes - wanting new stuff (materialistic)
What is marginal propensity to consume?
Willingness of households to spend their extra income
What factors affect investment?
Rates of economic growth
Business expectations and confidence
Demand for exports
Government rules
Access to credits (ability to borrow money)
Retained profit
Technological changes
Costs of factors of production
What factors affect government expenditure?
Trade cycle
Fiscal policy
Age distribution of pop (older pop = social care/pension, young pop = education)
