Aggregated Demand Flashcards
Aggregate demand?
The total output or real GDP of an economy that buyers want to buy at a given price.
Downward sloping AD curve
The average price level of a good rises, AD in the economy falls
What are the 4 components of GDP expenditure?
Consumer spending, investment, government expenditure, and net exports(exports-imports)
How do interest rates affect AD curve
The additional charge for borrowing which can be controlled through monetary policy.
As interest rates increase, consumer borrowing decreases do consumer spending decreases which leads to a shift to the left on the AD graph
How does wealth affect the AD curve?
Value of assets people own. As an increase in consumer wealth makes people feel wealthier and therefor spend more which leads to a shift right in AD curve
How does income affect AD curve
The money that people earn. If income increases then there is an increase in consumer spending, as people will have more money to spend on goods and services. If personal income taxes are reduced then people have more disposable income to spend. AD curve will shift to the right
How does consumer confidence/expectations affect AD curve?
How optimistic the consumers are about the future of the economy. If consumers feel good about the future of the economy they are more likely to spend and AD shifts right
How does household indebtedness affect AD curve?
Refers to how much money people owe from previously taken out loans, when consumers have a high level of debt, they are under pressure to make high repayments which cuts their present expenditure resulting in a shift left in the AD curve
How does interest rates affect investment and AD curve
As interest rates increase the cost of borrowing increases so consumers buy less meaning there is a decrease in investment spending by firms which leads to the AD curve to shift left
How does technology affect investment and AD curve
New technology spurs businesses to invest.
Rapid development in computers would lead to businesses investing in new computers which would shift AD right
How does business confidence affect investment and AD curve?
This is how optimistic firms are about future sales and economic activity. If a business is optimistic they invest more which causes a shift to the right of the AD curve
How does business taxes affect investment and AD curve?
If the government taxes more, investment spending decrease which cause a shift to the right. Firms have less money to spend
How does the level of national income affect investment and AD curve?
As income increases consumption increases which leads to pressure on firms capacity. Firms will then invest in things in equipment to meet demands
How does government expenditures affect AD curve?
Political priorities: if a government prioritizes public goods and bigger government then its spending will increase.
Economic priorities: fiscal policy spending with shift AD
How does and increase in the value of the dollar affect AD curve?
When the dollar increases it causes the countries exports to be more expensive to foreigners causing the quantity of exports to decrease. Imported goods become less expensive
So AD shifts left
How does the value of the dollar decreasing affect AD curve?
Exports become cheaper and more competitive so exports increase, but imports become more expensive
AD shifts right
