Aggregate Demand ( AD ) Flashcards
1
Q
What does AD comprise of?
A
AD= C+I+G+ (X-M)
2
Q
What shifts AD
A
-Decreased intrest rates
-Boom phase in the economic cycle
-Decrease in tax
-Increase in government spending
-Better trade balance
3
Q
What is the multiplier effect
A
An initial injection in the economy which leads to an increase in investments by firms and and increase in government spending which cause further shifts in AD
4
Q
What is the accelerator effect
A
Where an increase in GDP results in a proportionally larger rise in capital investment
5
Q
What is MPC
A
Marginal propensity to consume measures the proportion of extra income spent on consumtion
6
Q
How do you calculate the multiplier
A
1 / (1- MPC)
