Lesson 13 - Components of AD Flashcards
What is aggregate demand?
Total level of planned real expenditure on goods + services produced within a country
What are the components of aggregate demand?
Household spending ( C )
Investment spending ( I )
Govt. spending ( G )
X - M
What is found on the x and y axis of an AD diagram?
x - Real GDP
y - General price Level
What is General Price Level?
Average of current prices across entirety of goods + services produced in the economy
What is real GDP?
Value of output adjusted for price changes
Which general correlation does the AD curve show?
Increase in general price level reduces real GDP within an economy
Why does the AD curve slope down?
Higher price level causes - Falling real incomes
Worse balance of trade
Interest rate effect
How does an increased price level lead to falling real incomes?
Value falls
Consumers less able to buy what they want + need
How does an increased price level lead to worse balance of trade?
Foreign goods + services cheaper
Fall in exports, rise in imports
How does an increased price level lead to the interest rate effect?
Inflation causes increased demand for money
Interest rates + loans rise
Fall in consumer + business demand
What are the 2 types of conditions that can shift AD?
Tailwinds - AD moves right, economy grows
Headwinds - AD moves left, growth difficult
Give 3 examples of tailwinds
Fall in exchange rate (Exports rise)
Tax cuts (Consumption rises)
Rising house prices
Low interest rates (More spending + money in circulation)
Give 3 examples of headwinds
Lowered govt. spending
High interest rates + lowered borrowing
Lack of investment by firms
Decreased trade
