MACR Flashcards
Aggregate demand definition
Total demand of domestically produced goods and services that buyers collectively desire to purchase at each GPL in a given time period
What makes up AD
C+I+G+(X-M) which is the planned consumption expenditure + Investment expenditure + government expenditure + net total export expenditure on goods and services
What is the wealth effect?
Assuming unchanged nominal wealth, a fall in GPL will increase the real value of households wealth. As their PP increases they are more willing to consume goods and services hence consumption rises and so does real gdp
What is the interest rate effect?
When GPL falls, households and firms require less money to conduct their activities which means they have more money to save, increasing supply of loanable funds in the market. This will place a downward pressure on interest rates making it cheaper for households to borrow and purchase consumer goods and services. Thus, C and I rises causing rise in real GDP
What is the international sub effect?
When domestic GPL falls, assuming no change in the foreign exchange rate and foreign prices, price of local goods relative to domestic goods falls making domestic goods more price competitive. Thus, import expenditure decreases as households switch to buying cheaper domestic goods while export revenue increases from foreigners buying local goods. Hence net exports increases so GDP increases
what is autonomous consumption
changes in consumption arising from non-income factors
what is induced consumption
changes in consumption arising from changes in income
Factors of Shifts in AD
- expectation of future income levels
- expectation of changes in households real wealth
- expectations about future change in GPL
- Availability of credit
- interest rates
- personal income tax
elab about future income level
optimism in future state of economy means high consumer confidence as expanding economy brings abt job vacancies and higher income. hence when households expect economy to do well they also expect a higher income stimulating consumption as they are more willing to buy big-ticket
alab abt changes in households real wealth
if they expect increase in real value due to stock market or property boom etc, this prompts them to save less and be willing to consume more as they feel wealthier so ad rises
future change of gpl
expect inflation rate to rise, bring forward their consumption to avoid paying higher prices in the future, increase in willingness of household to consume goods and services now
interest rates
fall in interest rates means cos of borrowing money is lower so households more willing to borrow and spend since the int payments are lower and more affordable. since the return of savings also decreases, this increases their willingness to consume more in the present since opp cost is lower
factors affecting planned investment expenditure
interest rates and expected rate of return for the investments and availability of credit
elab about interest rates
Interest is the cost of investments by firms. The lower the interest rates, less expensive it is for firms to finance their investments because they finance the purchase of capital goods through borrowing which requires them to pay interests to their creditors or by using undistributed profits causing them to forgo the interest they would have received if they put them in the bank. However, with lower interest rates, investments which were previously unprofitable are now profitable due to higher expected rate of return which is more than interest rates hence they will be taken.
expected rate of return of the investments
expectations abt future - expanding economy and improved profit margins make them want to increase their capacity by buying more capital
tech advancements that give rise to new business opp
