Aggregate Demand (Pack 2)

• How is Aggregate Demand (AD) calculated?

  AD = C + I + G + (X - M)
• Why does the AD curve slope downwards?

  Due to the inverse relationship between price and quantity demanded
• What is the definition of 'consumer spending'?

  Expenditure by households on goods and services
• What is real disposable income and how does it influence consumer spending?

  The flow of money after direct taxes and adjusted for inflation. Higher real disposable income increases consumer spending
• What is the wealth effect and how does it affect consumer spending?

  The idea when the value of the stocks of assets that someone owns rises. Increased wealth increases consumer spending.
• What is consumer confidence and how does it affect consumer spending?

  A household’s optimism or pessimism on their future financial circumstances based on their expectations of the economy. Higher consumer confidence leads to increased consumer spending.
• What is interest rates and how does it influence consumer spending?

  The cost of borrowing or the reward for saving in a financial institution e.g. A bank. Lower interest rates increases consumer spending
• What is savings and how does it affect consumer spending?

  Disposable income which is not spent on consumption. Less savings increases consumer spending.
• What are four factors that might encourage saving?

  Higher interest rates, financial security, tax incentives, and future planning
• What is the difference between gross and net investment?

  Gross investment includes total spending; net investment excludes depreciation
• How does the rate of economic growth affect investment levels?

  Higher economic growth typically increases investment levels
• What is the effect of spare capacity on investment levels?

  More spare capacity can deter new investments
• How do business confidence and expectations influence investment levels?

  Higher confidence leads to increased investment levels
• What are 'animal spirits' in the context of investment?

  Emotional factors that influence business investment decisions
• How does demand for exports affect investment levels?

  Higher demand for exports can boost investment levels
• What is the impact of the rate of interest on investment levels?

  Lower interest rates generally increase investment levels
• How does access to credit influence investment levels?

  Better access to credit typically increases investment levels
• What is the definition of 'government spending'?

  Expenditure by the government on goods and services
• What are the three types of government spending?

  Current, capital, and transfer payments
• How does the trade cycle influence government spending?

  Government spending may increase during economic downturns
• How does fiscal policy influence government spending?

  Fiscal policy decisions can increase or decrease government spending
• What role do social pressures play in government spending?

  Social pressures can lead to increased government spending on welfare
• How do political influences affect government spending?

  Political priorities can shift government spending allocations
• How does past spending and debt influence government spending?

  High past debt may limit future government spending
• What changes could shift the AD curve to the left?

  Decrease in consumer confidence or higher interest rates
• What changes could shift the AD curve to the right?

  Increase in government spending or rise in consumer wealth
• What are the factors influencing consumer spending?

  They are:

  • Real disposable income
  • Wealth
  • Consumer confidence
  • Interest rates
  • Savings