Components of AD Flashcards
What influences consumption GEWI
General state of the economy- households spend more if they have confidence
Expectations of overall health of economy- confidence
Wealth effects- changes in wealth induce changes in consumer expenditure
Interest rates- increase may encourage saving and deters consumption
Marginal propensity to save (MPS)
Proportion of an increase that households would devote to saving
Marginal propensity to consume (MPC)
Proportion of additional income devoted to consumption
Amount of increased additional income increases
Average propensity to consume
Proportion of income that households devote to consume
Consumption function
Relationship between consumption and income
It is not expected that the empirical relationship is an exactly straight line, influenced by other factors
What effects investment AOI
Animal spirits- could result in instability in the economy
Overall state of the economy
International competitiveness- exporting activity
Net investment
Undertaken to increase a firms productive capacity
Gross investment
Net investment + depreciation (old capital)
Replaces capital worn out
Benefits of investment IC
Increase of the stock of capital available for production
Compromised plant and machinery, vehicles and other transport equipment, buildings, etc
Government incentives for investment
May use regulation to influence the pattern or location of investment
Discourage inflation
Beneficial impact on tax concessions, expanding productive capacity
Impact of interest rates on investment
Firms discouraged if high
Represents cost of borrowing
Profits used to buy assets
How do exchange rates affect government expenditure
Affects relative prices of UK goods and those produced overseas
Factors of government expenditure
Mainly autonomous
May choose to manipulate its spending in order to influence path of economy
Varies with fluctuations in overall level of economic activity (recovery period and recessions)
