THEME 2, Aggregate demand (2.2) Flashcards
How is Aggregate Demand calculated?
Consumption + Investment + GOVt spending (exports-imports)
What is consumption?
Spending on goods and services by households for private consumption
What is Investment?
Spending on goods that make other goods.. By businesses
What are exports?
- Goods + Services made in the UK to be sold to overseas customers
- This includes the tourism as for example a French man will use services in London, money will end up in the UK not France
What are imports?
Foreign goods + services bought by UK citizens
What are factors that change the level of household saving?
- Real interest rate
- Price expectations
- Availability of credit
- Unemployment / job security
- Consumer confidence and expectations
- Taxation of savings
- Trust in savings institutions
What is the biggest component of aggregate demand?
Consumption
What percentage of AD was consumption in 2019 and 2020?
- 2019 - 63%
- 2020 - 60%
How is aggregate demand measured?
- Quarterly
How does increasing consumer confidence affect aggregate demand?
- Increasing consumer confidence means that consumer spending will increase.
- People are more confident when jobs are secure and price expectations are normal
- Increase demand for goods and services hence AD increases
How do interest rates affect aggregate demand?
- If there are lower interest rates then people with a mortgage will pay less monthly
- More money to consume goods and services
How does GOVt spending affect aggregate demand?
When GOVt spending increases this increases economic activity, which increases AD,
How do exchange rates affect AD?
- When the value of the pound (£) falls:
- Importing items becomes more expensive
- Exporting items becomes cheaper
- This would cause volume of exports to rise which would positively impact AD
What is aggregate demand?
The total demand for all finished goods and services produced in an economy.
What is on the X and Y axis of a aggregate demand curve diagram?
- X axis - Real GDP (RNO)
- Y axis - Price level
What is RNO?
Real National Output
Why does GOVt spending change?
- Employment
- State of the world (e.g. Covid or Wars)
- Ideology (Left wing favours public sectors whereas right wing favours private sectors)
What does the AD curve show?
The relationship between the price level and the equilibrium level of real income and output.
What does a change in price level result on an AD curve?
Movement along the AD curve
What do higher prices lead to in Aggregate demand?
Higher prices lead to falls in aggregate demand
When do shifts occur in the AD curve?
If there is a change in any relevant variable apart from price levels
Give me an example of a real variable, in the context of an AD curve.
Willingness of consumers to spend
Give me an example of a monetary variable, in the context of an AD curve.
Rate of interest
What does aggregate mean?
The sum or total
What is the aggregate demand curve?
- Shows the relationship between the price level and equilibrium national income.
- As the price level rises the equilibrium
level of national income falls
What is the definition of investment?
- The addition of capital stock to the economy.
- It is only seen as investment if real products are created so buying a share in a company would be saving but buying new machinery is investment.
What is net investment?
- Gross investment minus the value of depreciation
What is gross investment?
- Amount of investment carried out and ignores the level of depreciation
What influences investment?
- Rate of economic growth
- Animal spirits
- Demand for exports
- Interest rates
- Influence of GOVt regulations
- Access to credit
- Technological change
- Costs
What are Keynesian animal spirits?
- Keynesian animal spirits refer to the non-rational, emotional factors that influence economic behaviour and decision-making.
What happens when animal spirits are high?
- When animal spirits are high, people tend to be more confident, and willing to invest or spend money
- Leads to increased economic activity and growth.
What happens when animal spirits are low?
- When animal spirits are low, people may become more cautious and reluctant to invest or spend,
- Potentially leading to economic downturns or stagnation.
How does demand for exports affect investment?
- If world economy is booming demand for exports will increase…
- Exporting firms’ investment is likely to increase to cope w/ extra demand
How do interest rates affect investment?
- If there are high interest rates it is more expensive to borrow money
- Businesses will be more cautious to ensure profits can cover interest rates
- Investment will go down if there are high interest rates.
What influences net-trade balance?
- Real income
- Exchange rates
- State of global economy
- Degree of protectionism
- Non-price factors
- Prices
