Macro - Characteristics Of AD Flashcards
Aggregate demand equation
AD=C+I+G+(X-M)
Aggregate demand (AD)
The total expenditure on an economy’s goods & services at any given price level
Consumption (C)
Total spending by consumers on domestic goods/services
Investment (I)
Spending that increases the size of a nations capital stock
Government spending (G)
Spending set by the government to inject economic activity into the economy
Net exports (X-M)
Export revenue - Import expenditure
The importance of Aggregate demand
It is used by economists to measure the strength of a economy
The importance of consumption
It makes up around 60% of the AD figure. This means that factors that affect consumption are likely to have a big impact upon AD
The importance of investment
Makes up for around 15% of AD. Changes in investment shift the aggregate demand curve to the right or left by an amount equal to the initial change in investment times the multiplier.
The importance of government spending
Makes up for around 25% of AD. Increased government spending is likely to cause a rise in aggregate demand (AD). This can lead to higher growth in the short-term. It can also potentially lead to inflation.
The importance of net trade
Makes up around 1% of AD. This is one of the reasons why some countries such as the UK decide to ignore their current account deficit, as the effect it has on AD is minimal.
Aggregate demand depends upon…
Domestic expenditure
Foreign expenditure
Consumption depends upon…
Disposable income
Interest rates
Confidence
Investment depends upon…
Profits
Interest rates
Confidence
Government spending depends upon…
Tax revenue
Budget position
Debt burden
net exports depends upon…
Exchange rates
Global demand
Relative inflation rate
The AD curve
It shows the total spending on domestic goods and services at each price level. Horizontal axis shows real GDP & the vertical axis shows the price level.
Why is the AD curve downwards slopping
The wealth affect
Increased exports revenue
Lower interest rates
The wealth affect
When their is a fall in price level, this gives consumers the perception that they are wealthier as their purchasing power increases. This will lead to a increase in GDP
Increase in export revenue
Decrease in prices for goods/services will lead to exports becoming cheaper. This will lead to export revenue to increase, leading to a increase in GDP
Lower interest rates
As price level/inflation goes down interest rates may also decrease. Consumer investment may increase, leading onto real GDP increasing.
What’s the difference between a movement/shift of the AD curve?
a change in the general price level of goods/services within an economy will cause a movement along the AD curve, whereas a change in the value of the components of AD will cause AD to shift.
