2.2

• aggregate demand

  a measurement of the total amount of demand for all finished goods and services produced in an economy
• components of aggregate demand

  • consumption - 60% of AD
  • investment - 15% of AD
  • government spending - 25% of AD
  • net exports - 1% of AD
• Components of Aggregate Demand (AD)

  • Consumption
  • Investment
  • Government Spending
  • Net Exports
• Aggregate Demand (AD)

  The total demand for goods and services within an economy at a given price level and during a specific period
• Consumption (C)

  The total spending by households on goods and services
• Investment (I)

  The spending by businesses on capital goods, research, and development
• Government Spending (G)

  The expenditure by the government on public goods and services
• Net Exports (NX)

  The difference between a country's exports and imports
• Consumer Confidence

  The level of optimism or pessimism that consumers have about the future state of the economy
• Fiscal Policy

  The use of government spending and taxation to influence the overall level of economic activity
• Monetary Policy

  The use of central bank tools to control the money supply and influence economic growth
• Trade Deficit

  A situation where a country's imports exceed its exports
• Trade Surplus

  A situation where a country's exports exceed its imports
• Aggregate Demand Curve

  A graphical representation of the relationship between the price level and the quantity of real GDP demanded in an economy
• Shift in the AD Curve

  A change in the overall level of AD at various price levels
• Movement Along the AD Curve

  A change in the quantity of real GDP demanded caused solely by changes in the price level
• Economic Boom

  A period of rapid economic growth characterized by increased consumer spending, high investment, and low unemployment
• Economic Recession

  A period of economic decline with reduced consumer spending, decreased investment, and rising unemployment
• Expansionary Fiscal Policy

  Government actions aimed at increasing aggregate demand
• Contractionary Fiscal Policy

  Government actions aimed at reducing aggregate demand
• Inflation

  A sustained increase in the general price level of goods and services in an economy over time
• Deflation

  A sustained decrease in the general price level of goods and services in an economy over time
• Stagflation

  A situation characterized by high inflation and high unemployment, usually occurring during an economic downturn
• income

  transfer of value received over a set period of time in exchange for services or products

  a 'stream'
• wealth

  a 'stock'

  holds its value overtime
• disposable income

  income that an individual receives after having paid any direct taxes and received any transfer payments/benefits
• discretionary income

  income left after tax and other necessary payments (mortgage) that an individual gets to choose how to actually spend on goods and services
• exogenous consumption

  some level of consumption is needed for all people

  'subsistence' level of consumption - need to consume enough to survive
• endogenous consumption

  consumption determined by our level of income

  as income increases, consumption increases
• marginal propensity to consume (MPC)

  for every additional £1 of income we receive, we consume a certain amount
• marginal propensity to save (MPS)

  for every additional £1 of income we receive, we save a certain amount
• marginal

  each additional unit
• propensity

  tendency to behave in a particular way
• interest rates

  the price of borrowing/lending money
• gross investment

  measures investment before depreciation
• net investment

  measures investment after depreciation
• depreciation

  fall in the value of an asset
• animal spirits

  Keynes

  investors acted based on significant amount of emotion, potentially scared and worried about losing huge amounts

  modern behavioural economists world consider this to contain elements of heuristics, loss aversion and herd behaviour
• credit

  ability to borrow for a specific purpose
• factors affecting investment

  • economic growth
  • business expectations/growth
  • interest rates