Aggregate Demand Flashcards
equation from AD
C + I + G + (X-M)
What is consumption
spending on goods and services
What is investment
spending on assets used over a number of years to produce goods and services
Marginal Propensity to consume (MPC)
The amount of an increase in earnings that is spent (change in consumption divided by change in income)
Marginal Propensity to save (MPS)
The amount of an increase in earnings that is saved
Average Propensity to consume (APC)
The total proportion of income spent (Consumption divided by income)
Average Propensity to Save (APS)
the total proportion of income saved
What factors influence Consumer spending
- Disposable income
- consumer confidence
- Interest rates and the supply of credit
- Distribution of income
- Actual changes in the economy e.g. changes in house prices
Factors affecting level of investment
- Actual and expected demand
- Demand for exports
- Interest rates
- Risk
- MEC
- Technological change and competitiveness
Marginal Efficiency of Capital (MEC)
The expected return on an investment at a given time (compare to interest rates)
What is Keynes ‘Animal Spirits’
The importance of confidence and gut instinct of business people in making decisions
What is the accelerator effect
An increase in national income results in a proportionally larger change in investment I.e. increased growth leads to increased capital spending
Why is investment important
- Creates Demand
- Increases productive potential
- Improves competitiveness and productivity
how is government spending effected
- Policy commitments
- The government in power
- Stage in business cycle
What is the multiplier
When an injection into the circular flow causes a bigger final increase in national income
Formula for MPC
Change in consumption divided by change in income
Marginal Propensity to Tax (MPT)
measures the proportion of an increase in income taken in tax
Marginal Propensity to Import
the proportion of an increase in income spent on imports
Marginal Propensity to Withdraw
How much is leaked or ‘withdrawn’ from the economy
How to calculate MPW
MPS + MPT + MPM
2 ways to calculate multiplier
1/(1-MPC)
1/MPW
