Theme 2 Flashcards
Define Aggregate Demand
Total planned real expenditure on goods and services produced within a country in each period
Components of AD
• Household spending on goods and services (C)
• Investment Spending (I)
• Government Spending on Public Services (G)
• Exports of Goods and Services (X)
• (minus) Imports of Goods and Services (M)
Formula for AD
C+I+G+(X-M)
Why is the AD curve downwards sloping
Real income effect
As price level falls, real value of income rises and consumers can buy more of what they want
Factors leading to a fall in AD
Fall in net exports
Cut in government spending
High interest rates
Factors leading to a rise in AD
Depreciation in value of exchange rate
Cut in rate of taxes
Increase in house and share prices
Define marginal propensity to consume (MPC)
The change in spending following a change in income
Factors that affect consumer spending
Interest rates
Household wealth
Consumer confidence
Define disposable income
Income after taxes and benefits
Define gross investment
Total investment on new capital inputs
Define net investment
Gross investment adjusted for capital consumption (accounting for depreciation)
Factors influencing investment
Actual and expected demand for goods and services
The state of business confidence / pessimism
Business taxes – affecting post-tax returns on projects
Evaluation of high level of investment
+ Injection into circular flow of income
- Some capital goods may be imported - leakage from circular flow
Economic trade cycle
As GDP rises government will receive more tax revenue
Government less likely to spend whilst economy is expanding
What is Fiscal Policy
Use of government spending, taxation and government borrowing to affect level of growth of AD and output
