Characteristics of Aggregate Demand Flashcards
Which way does the Aggregate Demand curve slope?
Downwards
What does the Aggregate Demand curve show?
The relationship between the price level and equilibrium output in the economy
What does a movement along the Aggregate Demand curve show?
- Shows how real output will change if there is a change in price level
How is the Aggregate Demand curve shifted?
- Is caused by a change in variables such as consumption and exports
Define Aggregate Demand.
- Is the total of all demands in the economy at any given price.
What four components is national expenditure made out of?
- Consumption (C)
- Investment (I)
- Government Spending (G)
- Exports minus Imports (X-M)
National Expenditure - what does consumption refer to?
- Is spending by households on goods and services
National Expenditure - What does Investment refer to?
- This is spending by firms on investment goods
National Expenditure - What does Government Spending refer to?
- Includes current spending like wages
- Includes governments capital investment. EG, roads and new schools
What is the Aggregate Demand equation?
AD = C + I + G + (X-M)
What does the Aggregate demand curve show?
- Shows the relationship between the price level and the level of real expenditure in the economy
Which axis is the Price Level on, in the Aggregate demand diagram?
Vertical Axis
Which axis is the Real Output on, in the Aggregate demand diagram?
Horizontal Axis
What is a change in Price Level?
Inflation
What must Real Output on the x axis = ??
Real expenditure and Real Income
What is Consumption expenditure influenced by?
- Rate of interest in an economy
What happens to firms and consumers when prices RISE?
- Both need more money to buy the same number of goods and services as before
How do firms and consumers get more money?
- By borrowing
If prices rise then firms and consumers cannot buy as much as before, where do they get this extra money needed?
- Loans (Borrowing)
- So the demand for loans will increase
Evaluative point for borrowing money.
- If banks have a fixed supply of money the rate of interest increase (so it becomes more expensive to borrow)
- A rise in interest rates leads to a fall in consumption
What is another way a rise in price level affects consumption?
The wealth effect
How doe the wealth effect affect consumption?
- If there is a rise in the price level the real value of an individuals consumers wealth being lower.
- A fall in real wealth will result in a fall in consumer spending
What is investment affected by?
- Affected by changes in the rate of interest.
What is business investment likely to be if interest rates are high?
Fewer projects are undertaken by firms because they are less profitable.
