The Determinants of Aggregate Demand Flashcards
What is the Price Level?
The average of prices for all goods and services in an economy
What is Real National Output?
The output of the economy taking into account inflation
What are the components of Aggregate Demand?
Consumption
Investment
Government Spending
Net Exports (Exports - Imports) (X-I)
What is the formula that is made up of the components?
C+I+G+(X-M)
What determines the level of consumption in a household?
Income Interest Rates Levels of Personal Debt Levels of Personal Wealth Marginal Propensity to Consume/Save
What other factors can consumption be affected by?
Taxation
Unemployment
What is Savings?
Any disposable income that is not used for consumption is saved
What are the determinants of saving?
Interest Rates
Confidence
Inflation
What is investment for firms?
Improving capital
What are the determinants of investment?
Interest Rates Confidence Government Incentives Economic Growth Profit Levels Price of Capital Equipment Technology Tax
What is the Accelerator Effect?
Shows the relationship between GDP and the rate of investment
- An increase in GDP will lead to a greater rise in investment
What does the government invest in, in the economy?
Public Services
Local Government Services
Welfare Expenditure
Interest on Debt
What are the determinants of Net Exports?
UK Productivity Exchange Rates Economic Growth in Other Countries Extent of Free Trade Relative Inflation
What global events can affect economic performance?
- If they are in recession then demand for UK exports will fall
- This will severely impact on those businesses that trade globally
- A fall in demand will impact on other areas of the economy
- The knock-on effects can lead to recessionary pressures in the UK
What causes a movement in AD?
Change in price level
