The determinants of AD

• What is aggregate demand?

  Aggregate demand is the total demand in the economy.
• What does aggregate demand measure?

  It measures spending on goods and services by consumers, firms, the government, and overseas consumers and firms.
• What are the components of aggregate demand?

  • Consumer spending (C)
  • Investment (I)
  • Government spending (G)
  • Exports minus imports (X-M)
• What is the largest component of aggregate demand?

  Consumer spending.
• What percentage of GDP does consumer spending make up?

  Just over 60% of GDP.
• What is disposable income?

  Disposable income is the amount of income consumers have left over after taxes and social security charges.
• From where might consumer income come?

  Consumer income might come from wages, savings, pensions, benefits, and investments.
• What is a consumer's marginal propensity to consume?

  A consumer's marginal propensity to consume is how much a consumer changes their spending following a change in income.
• What is a consumer's marginal propensity to save?

  A consumer's marginal propensity to save is the proportion of each additional pound of household income that is used for saving.
• What is the relationship between marginal propensity to consume and marginal propensity to save?

  A consumer's marginal propensity to consume added to the marginal propensity to save is equal to 1.
• What are the influences on consumer spending?

  • Interest rates
  • Consumer confidence
• How do lower interest rates affect consumer spending?

  Lower interest rates make borrowing cheaper and reduce the incentive to save, increasing spending and investment.
• What is the effect of lower interest rates on disposable income?

  Lower interest rates increase the effective disposable income of households by lowering the cost of debt.
• How does consumer confidence influence spending?

  Higher consumer confidence leads to increased investment and spending due to expectations of higher returns.
• What happens to consumer spending if there is fear of unemployment?

  If consumers fear unemployment, they are likely to spend less and save more, delaying large purchases.
• What percentage of GDP does capital investment account for in the UK?

  Capital investment accounts for around 15-20% of GDP in the UK.
• What is the main source of capital investment in the UK?

  About ¾ of capital investment comes from private sector firms.
• What is the smallest component of aggregate demand?

  Capital investment is the smallest component of aggregate demand.
• What are the influences on investment?

  • Rate of economic growth
  • Business expectations and confidence
  • Demand for exports
  • Interest rates
  • Access to credit
  • Government regulations
• How does high economic growth affect firms' investment?

  High economic growth leads to more revenue for firms, allowing them to invest more.
• What do firms need to be certain about to invest?

  Firms need to be certain about future returns to invest.
• What is the term coined by Keynes that describes instincts and emotions affecting confidence in an economy?

  The term is "animal spirits."
• How does demand for exports influence investment?

  Higher demand for exports encourages firms to invest due to expected higher sales.
• How do interest rates affect investment?

  Investment increases as interest rates fall, making borrowing cheaper.
• What is the opportunity cost of high interest rates for firms?

  High interest rates increase the opportunity cost of not saving money.
• How does access to credit influence investment?

  If banks are unwilling to lend, firms find it harder to gain access to credit for investment.
• What can firms use if they cannot access credit?

  Firms could use retained profits for investment.
• How does the level of saving in the economy affect the availability of funds for lending?

  The more consumers save, the more funds are available for lending and investing.
• How does the rate of corporation tax influence investment?

  Lower corporation tax means firms keep more profits, encouraging investment.
• What is the accelerator process?

  • The accelerator effect relates investment levels to changes in GDP.
  • Higher economic growth leads to more investment.
  • Investment levels are more volatile than economic growth rates.
• What percentage of GDP does government spending account for?

  Government spending accounts for 18-20% of GDP.
• What is included in government spending?

  Government spending includes expenditures on state goods and services, such as schools and the NHS.
• Why are transfer payments not included in government spending figures?

  Transfer payments are not included because no output is derived from them; they are simply transfers of money.
• What is the trade cycle?

  The trade cycle refers to the stages of economic growth that the economy goes through, including booms and busts.

  
• What happens during periods of economic growth in relation to real output?

  Real output increases during periods of economic growth.
• What might governments do during recessions to stimulate the economy?

  Governments might increase spending or cut taxes to stimulate the economy during recessions.
• How does fiscal policy influence the economy?

  Fiscal policy involves changing government spending and taxation to influence the economy.
• What is discretionary fiscal policy?

  Discretionary fiscal policy is implemented through one-off policy changes.
• What are automatic stabilizers in fiscal policy?

  Automatic stabilizers are policies that offset fluctuations in the economy without government intervention.
• What is expansionary fiscal policy?

  Expansionary fiscal policy involves increasing spending or reducing taxes during economic decline.