Aggregate Demand Flashcards
what is aggregate demand?
Aggregate demand (AD) is the total level of spending in the economy at any given price
what is aggregate demand made up of?
consumption (C), investment (I), government spending (G) and net exports (X-M).
what does the AD curve show?
the relationship between price level and real GDP.
why is the AD curve downward sloping?
a rise in prices causes a fall in real GDP and there are four key reasons for this:
The income effect
Substitution effect
Real balance effect
Interest rate effects
what causes a movement along the AD curve?
a change in prices , caused by inflation or deflation.
what causes a shift of the AD curve?
A shift of the AD curve is caused by a change in any other variable
what do shifts to the left and right mean for AD curves?
a shift to the right represents an increase in AD and a shift to the left represents a fall in AD.
what is consumption?
Consumption is spending on consumer goods and services over a period of time.
what is disposable income?
Disposable income (Y) is the money consumers have left to spend , after taxes have been taken away and any state benefits have been added. This means that disposable income is affected by government taxation as well as wages.
what is the most important factor in determining consumption?
disposable income.
Those who are earning a large income will be able to spend much more than those on a minimum wage.
What is the average propensity to consume? (APC)
(APC) is the average amount spent on consumption out of total income. In an industrialised country, the APC for the economy is likely to be less than one as people save some of their earnings.
how to work out MPC?
MPC= change in consumption
change in income
how to work out APC?
APC= total consumption
total income
what is the relationship between savings and consumption?
An increase in consumption decreases savings so the same factors which affect consumption are those which affect savings- but in the opposite way. For example, a rise in confidence will decrease
savings
what are some influences on consumer spending?
interest rates consumer confidence wealth effects distribution of income tastes and attitudes
how do interest rates affect consumer spending?
Most major expenditures are bought on credit so therefore the interest rate will affect the cost of the good for consumers.