Aggregate Demand Flashcards
What is aggregate demand?
The demand for a countries good and services at a given price level in a given time period
What are the components of aggregate demand?
Consumption
Investment
Government Spending
Net exports
What is aggregate demand measured in?
Real GDP
What causes a change along the demand line?
A change in price
What can cause a shift in aggregate demand?
Changes in:
Consumption
Savings
Investment
Government Spending
Net Exports
What is consumption?
The total spending of goods and services in an economy
What is MPC (marginal propensity to consume)?
The willingness of households to spend extra income that they earn
How does consumption affecting aggregate demand?
Higher consumption = higher AD
What does a right shift in AD signify?
Higher aggregate demand
What does a left shift in AD signify?
Lower aggregate demand
How do savings affect AD?
More savings decreases garage demand
How does investment affect AD?
More investment = more aggregate demand
What is investment?
The spending of money of capital goods in increase produciton
How does government spending affect AD?
More government spending = more AD
How do net exports affect AD?
More products exported = higher AD
What factors increase consumption?
Lower Interest rates
Higher Consumer confidence
Wealth effect - feeling more wealthy
Distribution of income (poor more likely to spend)
Higher Disposable income
What factors increase savings?
Higher level of real disposable income
Higher interest rates (higher rate of return)
Lower consumer confidence
Age structure of population (young/old more likely to spend)
What factors increase investment?
Lower interest rates = lower cost of borrowing
Higher business confidence
Lower corporation tax (more retained profit)
Lower spare capacity (need to increase it)
Strong competition
Lower price of capital
What are the different types of government spending?
Current spending
Capital spending
Welfare spending
Debt & interest payments
What is current spending?
Maintenance of public services
What is capital spending?
Spending on capital - schools, infrastructure
What is welfare spending?
Spending on benefits
What is debt interest spending?
Spending on debts
What increases exports from firms?
Higher disposable income abroad
Lower protectionism
Lower exchange rate (cheaper exports)
Lower inflation (cheaper exports)
Better quality of products
