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
During ……………., there real output in the economy falls, and there is negative economic growth
recessions
The economy goes through periods of booms and ………..
busts
Fiscal policy
Government policy that attempts to manage the economy by controlling taxing and spending.
How does fiscal policy work?
demand side policy.
Expansionary fiscal policy
During periods of economic decline, the government might increasing spending and boost AD or reducing taxes.
Contractonary Fiscal Policy
During periods of economic growth governments might decrease expenditure on purchases and also might increase taxes which reduces the size of the government budget deficit.
What are the main influences on the net trade balances?
Real income, exchange rates, state of the world economy, degree of protectionism and non-price factors.
How does real income influence net trade balances?
During periods of economic growth consumers can afford more and therefore import more which is a deficit on the current account.
How do exchange rates influence net trade balances?
Depreciation means imports become more expensive and exports are cheaper.
How does the state of the world economy influence net trade balances?
Decline in economic growth in one of the countries export markets means there will be a fall in exports. As consumer spending in those economies will fall.
How does degree of protectionism influence net trade balances?
Protectionist methods cause the trade deficit to reduce as the UK will be importing less due to tariffs and quotas on imports in the UK. However if it leads to retaliation exports might decrease too.
How do non-price factors influence net trade balances?
The competitiveness of a countries goods and services influenced by supply side policies impacts how many exports a country has. A country can be more competitive by being innovative etc.
