Shifts in AD Flashcards
Consumption - Disposable income
Disposable income: is the money consumers have left after taxes have been taken away and benefits have been added.
-Those who are earning larger incomes are able to spend much more than those on minimum wage.
Increase in disposable income -> increase in consumption -> increase in AD
Consumption - Interest rates
Interest rates: is the return on savings or the cost of borrowing.
-Higher interest rates -> increase cost on mortgage repayments ->
reduce consumption -> decrease AD
Consumption - Consumer confidence
Consumer confidence: is the measure of how optimistic consumers are about the future state of the economy.
-Low consumer confidence e.g. fear of recession or high inflation levels -> less consumption -> decrease AD
Consumption - wealth effect
Wealth effect: is a change in consumption following a change in wealth.
-Increase in wealth e.g. real house prices increase -> increase consumption -> increasing AD
Investment - rate of economic growth
Fast rate of growth in an economy -> higher levels demand leads to a higher rate of return -> increase investment -> increasing AD
Investment - Animal spirits
Animal spirits: the measure of how optimistic investors are about the future state of the economy.
Low animal spirits e.g. fear a recession -> decrease investment -> decrease AD
Investment - interest rates
Interest rate: cost of borrowing or returns on savings
High interest rates -> increase costs for borrowing -> decrease investment -> decrease AD
Investment - influence of government and regulation
Government -> policy e.g. offer tax-breaks or grants to businesses -> encourage investment -> increase AD
Highly regulated economy -> increases cost and time to invest e.g. planning regulations -> discourage investment -> decrease AD
Investment - access to credit
Credit: lending
High risk investments e.g. investing during a recession -> low access to credit -> decrease investment -> decrease AD
Government expenditure - the trade cycle
