2.2
CHARACTERISTICS OF AD
AGGREGATE DEMAND - total level of spending in the economy at any given price
COMPONENENTS OF AD
AD = C+I+G+(X-M)
CONSUMPTION - consumer spending on goods and services, makes up 60%
INVESTMENT - spending by businesses for capital goods, takes up 15%
GOVERNMENT SPENDING - e.g healthcare, education, etc, 20%
NET EXPORTS - exports - imports, takes up 5%
THE AD CURVE
Same components as demand curve
shows price level and real gdp relationship
REASON FOR DOWNWARD SLOPE
rise in price causes fall in real GDP
INCOME EFFECT
rise in price does not automatically cause rise in income, therefore
demand contracts
SUBSTITUTION EFFECT
if prices rise, people will prefer to buy imported foreign goods because
they are cheaper
this causes the net exports to decrease, causing AD to contract
2.2 1
, REAL BALANCE EFFECT
as prices increase, savings lose their value, causing people to want to
save more
causes less spending and less demand
INTEREST RATE EFFECT
rising prices means firms have to pay workers more, more demand for
money
higher interest rates, people will save, business will invest less
MOVEMENTS AND SHIFTS
MOVEMENT ALONG
caused by change in prices
caused by inflation or deflation
SHIFT
decrease in the rate of change = increased AD, but slower rate
decrease in change = decreased AD
any non price factors cause a shift
CONSUMPTION (C)
CONSUMPTION - spending on consumer goods over a period of time
DISPOSABLE INCOME
disposable income - income left over for individuals or households after taxes
as disposable income increases, consumer spending rises
MPC
MARGINAL PROPENSITY TO CONSUME
the proportion of an additional dollar of income that a consumer will spend
2.2 2
CHARACTERISTICS OF AD
AGGREGATE DEMAND - total level of spending in the economy at any given price
COMPONENENTS OF AD
AD = C+I+G+(X-M)
CONSUMPTION - consumer spending on goods and services, makes up 60%
INVESTMENT - spending by businesses for capital goods, takes up 15%
GOVERNMENT SPENDING - e.g healthcare, education, etc, 20%
NET EXPORTS - exports - imports, takes up 5%
THE AD CURVE
Same components as demand curve
shows price level and real gdp relationship
REASON FOR DOWNWARD SLOPE
rise in price causes fall in real GDP
INCOME EFFECT
rise in price does not automatically cause rise in income, therefore
demand contracts
SUBSTITUTION EFFECT
if prices rise, people will prefer to buy imported foreign goods because
they are cheaper
this causes the net exports to decrease, causing AD to contract
2.2 1
, REAL BALANCE EFFECT
as prices increase, savings lose their value, causing people to want to
save more
causes less spending and less demand
INTEREST RATE EFFECT
rising prices means firms have to pay workers more, more demand for
money
higher interest rates, people will save, business will invest less
MOVEMENTS AND SHIFTS
MOVEMENT ALONG
caused by change in prices
caused by inflation or deflation
SHIFT
decrease in the rate of change = increased AD, but slower rate
decrease in change = decreased AD
any non price factors cause a shift
CONSUMPTION (C)
CONSUMPTION - spending on consumer goods over a period of time
DISPOSABLE INCOME
disposable income - income left over for individuals or households after taxes
as disposable income increases, consumer spending rises
MPC
MARGINAL PROPENSITY TO CONSUME
the proportion of an additional dollar of income that a consumer will spend
2.2 2
