AD components

• What is Aggregate Demand (AD)?

  Total spending on goods and services
• How is aggregate demand calculated?

  AD = C + I + G + X - M
• What does consumption refer to in economics?

  Total amount spent by households
• What happens to aggregate demand when consumption increases?

  Aggregate demand increases
• What percentage of aggregate demand does consumption make up in the UK?

  About 65%
• What is the relationship between consumption and saving?

  High consumption leads to low saving
• What are the main factors affecting consumption and saving?


  • Income: Higher disposable income increases consumption.
  • Interest rates: Higher rates reduce spending.
  • Consumer confidence: More confidence leads to more spending.
  • Wealth effects: Increased wealth boosts spending.
  • Taxes: Higher taxes reduce disposable income.
  • Unemployment: Higher unemployment decreases spending.
• What is the difference between saving and investment?

  Saving is done by households; investment by firms
• What is the purpose of investment?

  To increase productive capacity and profit
• What percentage of aggregate demand does investment make up in the UK?

  About 15%
• What factors affect investment by firms?

  • Level of risk: High risk reduces investment.
  • Government incentives: Subsidies can encourage investment.
  • Interest rates: High rates lower investment.
  • Technical advances: New technology increases investment.
  • Business confidence: Optimism boosts investment.
• How do high interest rates affect investment?

  They reduce investment due to higher costs
• What are 'animal spirits' in business?

  Emotional factors affecting investment decisions
• What does government spending include?

  Money spent on public goods and services
• What is not included in government spending?

  Transfers like pensions and allowances
• What is a budget deficit?

  When spending exceeds revenue
• How does a government use fiscal policy?

  To influence aggregate demand through spending
• What happens to the circular flow of income during a budget surplus?

  Indicates an overall withdrawal from the flow
• What is net exports?

  Exports minus imports (X - M)
• How does the state of the world economy affect net exports?

  Higher real income increases imports, reducing net exports
• What factors affect imports and exports?

  • State of the world economy: Affects demand for imports/exports.
  • Degree of protectionism: Tariffs can reduce imports.
  • Non-price factors: Quality improvements can boost exports.
• What is the significance of net exports in aggregate demand?

  They make up a small percentage of AD
• What is the impact of non-price factors on net exports?

  Higher quality goods can improve net exports
• What is the relationship between government policies and aggregate demand?

  Policies can increase or decrease aggregate demand
• What is the effect of a budget surplus on aggregate demand?

  It may reduce aggregate demand
• How can a government balance its budget?

  By ensuring spending equals revenue
• What is the impact of high taxes on consumption?

  High taxes generally reduce consumption
• What is the effect of high interest rates on consumer spending?

  High interest rates reduce consumer spending
• What is the effect of unemployment on consumer spending?

  Higher unemployment reduces consumer spending
• How does consumer confidence affect spending?

  Higher confidence leads to increased spending
• What is the relationship between disposable income and consumption?

  Higher disposable income increases consumption
• What is the impact of wealth effects on consumer spending?

  Increased wealth boosts consumer spending
• What is the effect of taxes on consumer spending?

  Higher taxes reduce consumer spending
• What is the relationship between consumption and saving?

  High consumption leads to low saving
• What is the effect of government spending on aggregate demand?

  Government spending increases aggregate demand
• What is the significance of government spending in the economy?

  It influences overall economic activity
• What is the impact of a budget deficit on aggregate demand?

  A budget deficit can increase aggregate demand
• What is the effect of a budget surplus on government spending?

  A budget surplus may reduce government spending
• What is the relationship between exports and imports?

  Exports are inflows; imports are outflows
• What is the significance of net exports in aggregate demand?

  They make up a small percentage of AD