Theme 2: Aggregate Demand Flashcards
What is the equation for aggregate demand?
AD = C + I + G + (X-M)
C in the equation for aggregate demand?
Consumer spending- is how much consumers spend on goods and services.
I in the equation for aggregate demand?
Investment- business spending on capital goods.
G in the equation for aggregate demand?
Government spending- how much the government spends on state goods and services.
X-M in the equation for aggregate demand?
Exports minus imports
disposable income
Income remaining for a person to spend or save after all taxes and social security charges have been paid.
3 influences on consumer spending
NAME?
Wealth effects
people who own assets eg houses see them appreciate in value which causes them to feel wealthier and therefore spend more.
Gross investment
the amount that a firm invests in business assets that does not account for depreciation.
Net investment
gross investment minus depreciation
6 influences on investment
1-Rate of economic growth 2-Business expectations and confidence. 3-Demands for exports. 4-interest rates 5-Access to credit. 6-influence of government and regulations.
Why does rate of economic growth effect investment?
If growth is high they will have higher profits and can therefore invest more.
Why do interest rates effect investment?
Investment increases as interest rates fall. As the cost of borrowing is less and the return to lending is higher.
Why does influence of government and regulations effect investment?
The rate of corporation tax could affect investment. Lower taxes means firms keep more profits, which could encourage investment.
The ………… is when economic growth is fast, and it could be inflationary or unsustainable.
boom