consumer spending + saving + investement + government spending + net exports and aggregate demand Flashcards
what is consumption
the total spending by households on goods and services in the economy
what is aggregate demand
total demand for goods produced domestically, including consumer goods services and capital goods
what is the aggregate demand formula
C + I + G + (X - M)
what factors that shift AD left and right
- level of real disposable income —-> income tax
- decrease in marginal rate of income tax, level of real disposable income will increase, which increases MPC and therefore the level of consumption - interest rates / availability of credit
- cut in interest rate, decrease in borrowing falls and rate of return from saving falls, increases incentive for consumers to borrow money as its cheaper and spend it on more expensive items.
- if availability of credit is low, it will decrease impacts of interest rates and borrowing money - consumer confidence (animal spirit)
- higher MPC to consume
- job prospects and the level of unemployment, if its very low, they will feel confident and therefore will spend more
- asset prices - linked to wealth effect
- more wealthy they feel, house and share prices, the higher they are the wealthier people may feel, therefore would consume more - household indebtedness
- low debts, increase consumption
- high debts, people would would want to spend a lot less
what is marginal propensity to consume (MPC)
the willingness of a household to spend any extra income that they earn
what is the multiplier effect
the proportional amount of increase or decrease in final income that results from an injection or withdrawal of capital.
ie. investment demand increases by 1. firms will then produce to meet this demand. the national product has increased meaning that the national income has increased
what is saving
the part of disposable income that is not spend on goods and services in the economy. it is a determinant of AD
what factors affect saving in AD
level of real disposable income
-income rise, saving may increase
interest rates
- higher interest rates will encourage more saving due to the rate of return of savings which increase
consumer confidence
- if consumer confidence is low (recession, job cuts, wage cuts….) , this encourages people to save
range / trustworthiness of financial institutions
- if banks are untrustyworthy, this will decrease incentives to save. if there is a lack of banks, this will also decrease incentive to save
tax incentives. ie ISAs
- individual saving accounts create incentive to save as it is tax free to a certain threshold.
age structure of population
- middle aged individuals are mroe likely to save for their children and their own retirement
- 15- 30 and 60+ year old people are more likely to spend more money
factors of investment affecting AD
interest rates
- low interest rates, cost of borrowing is low, more borrowing to invest
business confidence
- expected profit (high more investment. vice versa)
- expected demand in the economy (high more investment. vice versa)
corporation tax
- retained profit profit left after tax is payed
- low corporation tax, more retained profit more to invest
spare capacity
- greater spare capacity the more investement
level of competition
- high competition in technological machinery, etc would lead to businesses increase in investement
price of capital
- low price of capital, increase investement
what is the accelerator effect
increase rate of RGDP which encourages investment
types of government spending
current spending
- maintenance of public services
- payment of public sector wages
capital spending
- infrastructure spending (airports, train lines, etc)
welfare spending
- benefits and pensions, (unemployment, child support, etc)
debt interest payments
- debts for different countries in the world
the top three are injections into the circular flow of the economy
what is budget deficit
government spending > taxation revenues in a fiscal year
what is budget surplus
when government spending < taxation revenues in a fiscal year
what is national debt
total stock of debt over time. accumulation of yers worth of budget defecit
determinants of net exports which shift AD
real disposable income earned abroad
- i f theres a boom abroad, marginal propensity to import goods are likely to increase
real disposable income earned at home
- if theres a boom in the economy at home, imports are likely to increase
strong or weak exchange rates
- SPICED (strong pound, imports cheap, exports deep)
- WIDEC (weak imports deep exports chap)
relative inflation levels at home
- inflation in home higher compared to trading partners abroad, our exports will be lower
(X - M) if bracket increases AD shifts right. vice versa.
AD is a measure of spending in the economy.
