aggregate demand Flashcards
definition of aggregate demand
the total demand for a country’s goods and services at a given price level in a given time period
what does aggregate demand consist of
consumer spending (C)
investment expenditure (I)
Government expenditure (G)
Net trade (exports (X) - imports (m)
expression for AD
C + I + G + (X-M)
what does the AD CURVE show
the quantity of goods and services that firms, governments, households and overseas buyers are prepared to buy at different values of the general/average price level
aggregate demand curve diagram
y axis = average price level
X axis = real GDP
downward sloping AD curve
what causes a movement along the AD curve
price level increase (inflation)- movement up the AD curve
price level decrease (deflation)- movement down the AD curve price
inflation n deflation definition
a sustained and general rise/fall in average prices.
what causes a shift in the AD curve
Consumer expenditure, Firm investment, Government spending, net trade (Exports minus imports)
an outward shift in AD causes…
an increase in real GDP and economic growth
inward shift of AD curve causes…
a decrease in real GDP and economic decline
determinants of consumer spending
changes to disposable income (composition function), interest rate changes, unemployment levels affect confidence of employed consumers, price expectations ( if we expect prices to go down more we will delay our spending) and composition of households (age)
determinants of investment
interest rate changes, business confidence, corporation tax changes, profitability
determinants of government expenditure
the most important government objective at the time, budget deficit at the time, current political party
determinants of net trade
exchange rate changes, strong pound means that imports look cheaper to domestic eyes so there are more leakages. weak pound means our goods look cheaper to foreign eyes so there are more injections. income levels change how likely home and abroad are to import goods. changes in quality of domestic goods. government restrictions.
what are government restrictions on trade
tariffs are taxes on imports. quotas are limits on how many items we can import.
