The characteristics of AD [2.2.1] Flashcards
What is the formula for AD?
C + I + G (X-M)
What components of AD have the biggest impact on economic growth?
Consumption, Investment and Government spending
What is Aggregate demand?
Total level of planned real expenditure on the goods and services produced within a country
What are all of the components of AD?
Household spending on goods and services (C)
Investment (I)
Government (G)
Exports of goods and services (X)
-(minus) imports of goods and services
What are the 2 components on the axis of an AD curve?
General price level - Average prices across the economy
Real GDP - Total value of goods sold or consumed in an economy
What is MPS and MNC?
How much people spend or save in an economy
What are reasons why the AD curve slopes down?
A higher price level leads to these following reasons:
Falling real incomes - As the price level rises the real value of income falls and consumers are less able to buy their wants or needs.
Balance of trade - A rise in the GPL makes foreign produced goods and services cheaper rise in import fall in exports.
Interest rates effect - Higher price level rises causes inflation and an increase in demand for money. Interest rates and loans will rise leading to a fall in consumer spending and business demand
What are the factors that shift AD to the right?
Tailwinds are conditions that help an economy grow.
Fall in the exchange rate for the pound which increases sales of exports.
Cuts in taxes so consumers spend more increases in houses prices make people more wealth.
Increases in house pries make people more wealth
Low interest rates and increases in supply of money
What are the factors that shift AD to the left?
Headwinds are conditions that make growth more difficult in an economy
Reduction in government spending
Higher interest rates and falls in borrowing
Lack of investment by firms
Fall in trade with other countries
