Aggregate demand (MAC) Flashcards
What does aggregate demand mean?
It is the total amount planned spending on goods and services at a given price level in an economy in a year
What is the formula of AD?
C+I+G+(X-M)
What are the importance of the components of AD?
Consumption: most significant, 60% of the total
Government expenditure: usually 25% of AD
Investment: around 15% of AD
Net trade (X-M): insignificant element of AD
What is the real balance effect?
When the price level rises, the purchasing power of cash assets falls, which leads to a decrease in the demand for real output
What is the international trade effect?
A rise in price level causes a decrease in the international competitiveness of UK goods, causing a decrease in demand for exports and a rise in demand for imports.
What is the interest rate effect?
A higher price level results in an increased demand for money. As a result interest rates will rise, reducing consumption and investment causing a contraction in AD.
What causes a movement along the AD curve?
A price level change causes a movement along the AD curve.
What causes a shift in the AD curve?
AD shifts are caused by a change in any one of its components.
What happens when there is a change in AD?
An increase in AD leads to a right shift in the curve
A decrease in AD leads to a left shift in the curve
What is consumption?
It is spending by households on goods and services.
What is the main determinant of consumption?
Disposable income
What is disposable income?
It is the money people have available to spend on goods and services.
What is the measuring agent of the relationship between savings and consumption?
The average propensity to consume
What is the formula of APC?
consumption / disposable income x 100
What is the formula of APS?
savings / disposable income x 100
