What is aggregate demand?
Aggregate demand is the total demand in an economy over a given period of time.
What does AD measure?
Spending on goods and services by consumers, firms, the government and overseas consumers and firms.
What is the formula for AD?
C + I + G + ( X - M )
What are the various components of AD?
- Consumer expenditure
- Investment
- Government expenditure
- Net exports ( Exports - Imports )
What is the consumption component of AD?
• Total amount spent by households on goods and services ( how much consumers spend on goods and services ).
What is disposable income?
- The amount of income consumers have left over after taxes and social security charges have been removed.
- It was consumers can choose to spend.
How do changes in consumption affect AD?
- An increase in consumption will mean an increase in AD.
* A decrease in consumption will mean a reduction in AD
What are the main factors influencing the consumption component? ( Evaluation )
- Interest Rates
- Consumer Confidence
- Income
- Wealth Effects
- Taxes
- Unemployment/Consumer Confidence
How does income affect consumption?
- As disposable income rises, consumption will rise.
- The rate at which consumption rises is lower than the rate of which income increases because households tend to save more as well.
How do interest rates affect consumption?
• Higher interest rates lead to less consumer spending.
• Consumers tend to save more to take advantage of the higher rates and they are less likely to borrow money or buy things on credit because it more expensive.
• Consumers may also have less money to spend if interest rates on existing loans and mortgages increase.
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• If interest rates are lowered, it is cheaper to borrow and reduces the incentive to save, so spending and investment increase.
• Lower interest rates lower the cost of debt, such as mortgages, increasing the effective disposable income of households.
