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
What are the advantages of more investment?
Investment is an injection to the circular flow of income - more AD
New capital can boost productivity and more capacity to supply
Extra demand in investment goods and leads to stronger multiplier effect on GDP
Boosts a country’s competitiveness and improve trade balance
What are the negative evaluation points of investment?
Some of investment could be imported which is a leakage
Might be a lengthy time lag between workers with more capital and productivity rising
Capital can replace labour so short term unemployment
Other factors affect competitiveness like exchange rate
What is net trade?
The value of exports minus the value of imports
What factors affect net trade?
Real income
Exchange rates
State of world economy
Degree of protectionism
How would real income affect net trade?
Higher real income increases the demand for goods/services which leads to more imports being demand (holidays)
How would exchange rates affect net trade?
Strengthening of the currency would reduce uk exports as it’s less price competitive so there is a fall in demand and imports are more attractive
How would state of world economy affect net trade?
A strong economy sees more imports to meet needs so domestic consumption increases
If economy productive capacity increases then the supply to the world like China who has largest global exports
How would the degree of protectionism affect net trade?
As trade broadens (enlargement of EU)
It gives rise to new export opportunities
Protectionist measures help restrict imports like tariffs - tax on imports
Quotas - restriction on quantity of imports
