Agreggate Demand

• What is aggregate demand?

  Total demand in the economy
• What does aggregate demand measure?

  Spending on goods and services
• What are the components of aggregate demand?

  C + I + G + (X-M)
• What does consumer spending represent in aggregate demand?

  It is the largest component of AD
• What percentage of GDP does consumer spending make up?

  Just over 60%
• What is disposable income?

  Income after taxes and social security
• What are sources of consumer income?

  Wages, savings, pensions, benefits, investments
• How do interest rates influence consumer spending?

  Lower rates increase spending and investment
• What is the effect of lower interest rates on disposable income?

  It increases effective disposable income
• How does consumer confidence affect spending?

  Higher confidence leads to more spending
• What can reduce consumer confidence?

  Fear of unemployment or higher taxes
• What is the marginal propensity to consume (MPC)?

  Proportion of additional income spent
• How can the government influence the MPC?

  By changing the rate of direct tax
• What is the relationship between MPC and MPS?

  MPC + MPS = 1
• What percentage of GDP does capital investment account for in the UK?

  Around 15-20%
• What is the primary source of capital investment?

  Private sector firms
• How does economic growth influence investment?

  Higher growth leads to more revenue for firms
• What do business expectations affect?

  The level of investment firms make
• What term did Keynes use to describe human behavior affecting confidence?

  Animal spirits
• How does demand for exports influence investment?

  Higher demand encourages firms to invest
• How do interest rates affect investment?

  Lower rates increase investment
• What happens when banks are unwilling to lend?

  Firms find it harder to access credit
• How does government regulation influence investment?

  Corporation tax rates affect investment decisions
• What percentage of GDP does government spending account for?

  18-20%
• What is included in government spending?

  Spending on state goods and services
• How does economic growth affect government spending?

  Higher growth may lead to less spending
• What is fiscal policy?

  Changing government spending and taxation
• What is discretionary fiscal policy?

  Implemented through one-off policy changes
• What is expansionary fiscal policy?

  Increasing spending or reducing taxes
• What is the current account balance?

  Exports minus imports
• What does a positive current account balance indicate?

  A trade surplus
• How does real income affect the current account?

  Higher income can lead to a larger deficit
• How do exchange rates affect imports and exports?

  Depreciation makes imports more expensive
• What happens to exports during a decline in a major export market?

  Exports will likely fall
• What is protectionism?

  Guarding industries from foreign competition
• How do non-price factors influence exports?

  Competitiveness affects the level of exports
• What is the marginal propensity to import (MPM)?

  Income spent on imports rather than domestic goods
• What does a fall in the price level cause?

  An expansion in demand
• What does a rise in the price level cause?

  A contraction in demand
• What explains the downward slope of the AD curve?

  Higher prices reduce real incomes