Aggregate demand

Flashcards by 09serukenyahol, updated more than 1 year ago
Created by 09serukenyahol about 6 years ago


International Baccalaureate Economics (Aggregate demand - macro ) Flashcards on Aggregate demand , created by 09serukenyahol on 04/11/2015.

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Question Answer
Aggregate demand equation AD = C + I + G (X-M) C = consumer spending I = investment G = government spending X = exports M = imports
Aggregate demand curve
Why does the aggregate demand curve slope downwards? - competitiveness of goods abroad? Is real income less or more? As prices rise. demand for an economies goods + services will be less. Goods will be less competitive in international markets and real income is less
Real income effect If you see a fall in average price level (APL) the income will increase; people have more disposable income.
Real balance effect Fall in APL = increase in purchasing power of any quantity of money that you have
International substitution effect - give an example If domestic APL prices are falling, households may substitute some of their spending/expenditure that was on imports for domestically produced goods. E.g For UK if price for washing machines decreased more are likely to spend on UK machines.
AD will shift when.. Any of the components in the equation change
There are three factors that shift the AD curve Fiscal policy Monetary policy Exchange rates
Fiscal policy How the government can influence Gov spending and taxes to impact AD
Monetary policy Its about changing the interest rate (IR). Decided by the bank of England Head is currently Mark Carney, Canadian
Monetary policy pt 2 Tight = IR go up - cost of borrowing goes up for consumers and it is likely C will decrease - cost of borrowing for firms goes up, I is likely to go down C and I are both components of AD so if they both go down = AD goes down Loose = IR goes down - cost of borrowing for consumers goes down, C is likely to go up - cost of borrowing for firms goes down, I is likely to go up AD = goes up
Exchange rates (XR) AD = C +I +G = (X-M) If XR goes down, e.g value of Euro goes down exports (X) become cheaper so X goes up, Imports (M) become more expensive and so M goes down. AD = goes up If XR goes up e.g value of Euro goes up, X become more expensive and M becomes cheaper and goes down. AD= goes down
Changes in expectation When confidence falls, you can see an increase in savings, business may postpone investment projects due to worries of low profits and weak demand
changes in household wealth A fall in the value or shares/ a crash in the housing market can lead to a decline in household finanacial wealth, fall in consumer demand. Falling asset prices have a negative effect on consumer confidence = expections :(
C total spending by consumers on domestic goods and services
I Addition of capital stock to the economy Replacement investment - firms spend on capital goods in order to maintain the productivity of existing capital Induced Investment - firms spend on capital goods in order to increase their output to respond to higher demand in the c=economy
G Spending by governments on a wide variety of goods and services. E.g education, nhs - free health care in the UK, transport etc
x Exports are domestic goods and services that are bought by foreigners
M Imports are goods and services that are bought from foreigners
What causes changes investment? - Interest rates In order to invest, firms need money. Firms can borrow money but if IR is high then they are likely not to borrow, if IR is low then this gives firm the incentive to borrow money and fund various schemes or projects - changes in level of national income If national income and C is rising quickly, there will be pressure on the existing capacity of firms. This may encourage firms to invest in new equipment = induced investment - technological change - expectations/ business confidence
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