Aggregate demand and supply - Key terms Flashcards
Aggregate Demand
The sum of all planned spending on domestic output at a given price level per period.
AD = C + I + G + (X-M)
Aggregate supply
The sum of all planned domestic production at a given general price level per period
Consumption
Spending by domestic households on consumer goods and services
Investment
Spending by domestic firms on capital goods
Net investment
Net addition to capital stock.
Net investment = gross investment - depreciation
Wealth effect
A rise in personal wealth will encourage consumers to spend more and save less
Net trade
Net spending on domestic output from foreign trade eg. earnings from sale of exported goods and services minus spending on imported goods and services
Circular flow of income
Model which explains what determines the equilibrium level of national income involving flows of income and spending between the household sector and firms
Income (Y)
Money earned over a period of time
Wealth (W)
The value of an individual’s assets at a point in time.
Animal spirits
The confidence of businessmen that a project might be worth investing in despite other financial forecasts
Injection
Spending on domestic output which comes from outside the simple circular flow of income eg. investment, government spending and exports
Withdrawal
Income which is not spent on domestic output (consumption) eg. savings, taxation and imports
Multiplier effect
The knock-on effects of an initial change in injections or withdrawals on national income to change more than the initial change
Marginal propensity to consume (MPC)
The proportion of an increase in income which is spent on domestically produced consumer goods and services. Higher MPC = higher multiplier effect
