Lesson 13 - Aggregate demand Flashcards
What are the components of aggregate demand?
Consumer spending on goods and services (household spending)
Investment spending
Government spending
Exports of Goods and Services
(minus) Imports of goods and services
The Aggregate Demand diagram is an important way of showing what?
The importance of all the spending in the economy to price levels and Real GDP
Define the term price level?
The average of current prices across the entire goods and services produced in the economy.
Define the term Real GDP?
The value of economic output adjusted for inflation
What is the formula for Aggregate Demand?
C + I + G + ( X - M )
What does a rise in price level cause in terms of Aggregate Demand
A contraction of Aggregate Demand
What does a fall in price level cause in terms of Aggregate Demand?
It causes an expansion in Aggregate Demand.
Define the term tailwinds?
Tailwinds are conditions that help the economy grow - pushing Aggregate Demand out.
Define the term headwinds?
Headwinds are conditions that make growth difficult - pushing Aggregate Demand in
Give three examples of headwinds?
Reductions in government spending
Higher interest rates and falls in borrowing
Lack of investment by firms
Give three examples of tailwinds?
Fall in the exchange rate for the £ which increases the sale of exports
Cuts in taxes so consumers spend more
Increase in house prices make people more wealthy
