Aggregate Demand

• What is Aggregate Demand?

  The total demand for final goods and services within an economy at a given price level and time period.
• What is the AD (word) formula?

  Consumption + Investment + Gov. spending + (Exports - Imports)
• What is the (symbol) formula for AD?

  C + G + I + (X-M)
• AD is a measure of total expenditure on a country's goods and services.
• What is purchasing power?

  The amount of goods and services that can be purchased with a unit of currency.
• What is the wealth effect?

  When the general price level decreases, purchasing power increases meaning consumption increases, increasing AD.
• What is the trade effect?

  When the general price level decreases, exports become more competitive and imports become less competitive meaning exports have a greater demand, increasing revenue generated.
• What is the interest effect?

  When the general price level decreases, interest rates can be kept low as they usually are high when inflation is high. This stimulates high consumption, investment and reduces the exchange rate.
• A fall in the general price level causes an expansion in Aggregate Demand.
• A rise in the general price level causes a contraction in Aggregate Demand.
• The Aggregate Demand curve shifts when there is a change in Consumption, Investment, Gov. spending, Exports or Imports independent to the price level.
• What does an outward shift in the AD curve mean?

  There is a rise in national output at all price levels and there is a higher level of demand at each price level.
• What does an inward shift of the AD curve mean?

  There is a fall in national output at all price levels meaning that total expenditure on goods and services at each price level has fallen.
• What has the biggest impact on AD?

  Consumption
• Consumption is the total planned spending by households on consumer goods and services within an economy.
• What are three examples of factors influencing consumption?

  Interest rates, level of income and consumer confidence
• When consumption rises, what happens to savings?

  They decrease.
• What was the % of consumption of GDP in 2012?

  61%
• What is the marginal propensity to consume (mpc)?

  The change on consumer spending following a change in consumer income.
• What is the formula for marginal propensity to consume?

  Change in consumption / change in income
• What is the households savings ratio?

  The amount of money that households have available to save.
• The savings ratio is measured as a percentage of total disposable income.
• What is the personal savings ratio?

  The percentage of disposable income saved rather than spent.
• How is the personal savings ratio calculated?

  Realised actual personal saving / Personal disposable income
• What does a high savings ratio mean?

  A lowered consumption and Aggregate demand as people are savings more instead of spending.
• When households borrow money eg a credit card, this is counted as dis-saving as borrowing allows them to spend more than their current disposable income.
• What are three factors influencing household saving?

  Availability of credit, consumer confidence and interest rates.
• What are the macroeconomic importance's of saving?

  Business survival, Funding investment and buffer for consumers.
• What can be a problem with savings?

  If many people save lots at once as they believe it is providing funds for the future, there can be a drop in consumer demand, possibly causing a deeper recession.
• What is the formula for savings?

  Disposable income - consumption
• What is the marginal propensity to save?

  A change in savings because of a change in household disposable income.
• What is the formula for marginal propensity to save (mps)?

  Change in saving / change in income
• What is government spending called?

  Fiscal spending
• What factors influence gov. spending?

  Economic performance, budgets, expectations and the party in charge.
• What is the public sector?

  Central and local government/state owned.
• What is the private sector?

  Private businesses and households
• In an economic boom the government can collect higher taxes for a higher budget and save money (higher employment = higher income tax)
• In an economic downturn, the government will collect less tax resulting in a smaller budget and may need to borrow money from the central bank (lower employment = more G spending on benefits)
• What is financial debt?

  The private sector, outstanding debts of banks and financial corporations.
• What are the consequences of debt?

  Constraint on future spending, banks are less likely to loan, less investment and high debt to GDP ratio.