Aggregate Demand (Macro) Flashcards
What are the components of aggregate demand?
Consumption
Investment
Government spending
Net exports
What are the main influences on government expenditure?
The trade cycle
Fiscal policy
What is government expenditure
Tax revenue and borrowing spent by the government for the benefit of the country’s citizens
What happens to government spending in a recession?
Economic growth is negative and government spending increase. Automatic stabilisers mean the gov will pay more in unemployment benefits to counter demand fall
What happens to government spending in a boom?
Unemployment drops leading to less spending on benefits
Tax receipts with increase so there will be less pressure on government spending
What is domestic consumption?
Spending on goods and services by individuals - durable and non durable goods
What factors affect consumption?
Interest rates
Consumer confidence
Wealth effects
How does disposable income affect consumption?
More disposable income leads to greater consumption as there is more to spend
How would interest rates affect consumption?
Lower interest rates means increased consumption as saving becomes less attractive and loans are more affordable
How would levels of wealth affect consumption?
More wealth means more consumption as they can borrow funds against the value of assets like their house
What is gross investment?
Spending on capital assets such as buildings, machinery and equipment
What factors may affect investment?
Rate of economic growth
Business confidence
Interest rates
How would the rate of economic growth affect investment?
The faster the economic growth, the quicker more capital equipment is needed
How would business confidence affect investment?
When firms are confident in future economic prospects like consumption then the more likely they are to invest in capital projects
How would interest rates affect investment?
Lower interest rates makes investment projects less costly and stimulate investment
