Determinants of aggregate Demand Flashcards
Aggregate demand
Total planned spending on the real output (goods and services) that the economy produces
Aggregate demand formula
Consumption(C) + Investment (I) + Government spending (G) + Net exports (X-M)
Consumption (C)
Total planned spending from households on goods and services. When consumption is high, savings is usually low and it causes a higher AD.
Investment (I)
Spending on capital goods by firms e.g. factories and machines. When investment is high, it causes the AD to be high
Government spending (G)
Money spent on public goods/services. A higher government spending causes a higher AD
Net exports (X-M)
Difference between income received from selling abroad and money spent to buy products/services from overseas, If X increases and M stays the same it causes the AD increases and vice versa
The accelerator effect
When an increase in national income (GDP) causes a rapid increase in investment spending on capital goods.
Budget deficit
Government spending>tax revenue
Budget surplus
Government spending<tax revenue
What influences consumption
Disposable income, tax, interest rates, consumer confidence
What influences investment
Interest rates, producer taxes, business confidence, technology
What influences government spending
Pandemic (healthcare, social transfers), size of deficit
What influences exports and imports
Taxes, political events, exchange rates, sanctions, world economy
