Aggregate demand & Aggregate Supply Flashcards
Explain the circular flow of income
Households provide factors of production, firms give households income in return for this, the income is used to spend money at the firm, the firm gives the households goods and services
What are the injections into the circular flow of income?
Exports, investment and government spending
What are the withdrawals into the circular flow of income?
Imports, savings and taxes
What is the multiplier effect?
When an injection is made into the circular flow, the actual change of national income is greater than the value of the initial injection
What is aggregate demand?
The total spending on all goods and services
What is the formula for AD?
Consumption + Investment + Government Spending + (Exports - Imports)
What are the main factors that affect consumption and saving?
- Income
- Interest rates
- Consumer confidence
- Wealth effects
- Taxes
- Unemployment
What are the main factors that affect investment by firms?
- Risk level
- Government incentives & regulation
- Interest rates & access to credit
- Technical advances
- Business confidence (animal spirits)
What are animal spirits?
Factors excluding reason and rational thinking that affect investment decisions. For example, human emotion, intuition, gut instinct
What are factors that affect imports and exports?
- Exchange rate
- Changes in the state of the world economy
- Degree of protectionism
- Non price factors
What is the formula for average propensity to consume?
Consumption/ Total income
What is the formula for average propensity to save?
amount saved/ total income
What is marginal propensity to consume?
The proportion of any extra income that’s spent on the consumption of goods & services
What is the formula for marginal propensity to consume?
Chane in consumption/ change in income
What is marginal propensity to save?
The proportion of extra income that is saved
