Define aggregate demand.
Aggregate demand is the total demand for all goods and services in an economy at any given average price level.
Formula for aggregate demand.
C+ I + G + (X - M) = AD
Define consumption.
Consumption is the total spending on goods/services by consumers in an economy.
Define investment.
Investment is the total spending on capital goods by firms.
Define government spending.
Government spending is the total spending by the government in the economy, excluding transfer payments.
Define net exports.
Net exports are the difference between the revenue gained from selling goods and services abroad and the expenditure on goods and services from abroad.
What is disposable income?
Disposable income is the money that households have left from their salary or wages after they have paid their direct taxes and have received any transfer payments or benefits.
How to rising property prices affect consumer borrowing?
Rising property prices give consumers more confidence to borrow money.
How does investment affect economic growth?
Investment helps to increase the capacity of an economy, leading to increased potential economic growth.
Define depreciation.
Decrease in monetary value of a capital good overtime.
Define gross investment.
Gross investment is the total amount of spending on the capital goods, including replacing old capital goods and purchasing new ones.
How does demand for experts affect investment?
If demand for experts increases, firms will likely increase investment to meet the global demand.
How does unemployment affect government expenditure during a boom?
During the unemployment falls, leading to lower levels of means tested benefit payments.
How does increase in the UK real income affect the trade balance?
Increase in UK income typically weakens the trade balance as consumers purchase more imports generating an increase in money outflows.
What is the effect of a countries currency appreciation on its exports?
Current appreciation makes exports more expensive in foreign currency terms, leading to a decrease in the value of exports.
How does currency depreciation makes import more expensive??
Makes imports more expensive in the countries own currency terms, leading to a decrease in the value of imports.
Define MPC.
Marginal propensity to consume. Means how much a consumer changes their spending following a change in income.
Define MPS
Marginal propensity to save. The proportion of each additional pound of house hold income that is used for saving.
How do interest rates affect consumption?
- cheaper to borrow and reduces incentive to save
- lower the cost of debt such as mortgages = increase consumption
Describe wealth effect.
When a rise in prices of personal wealth (e.g. houses) make people feel wealthier so they are likely to spend more
- A consumers housing equity is the difference between the market value of a property and of how much loan is remaining to be paid. If house prices increase, consumers experience a rise in equity so they are paying less on their mortgage than the house is worth on the market.
How does access to credit affect investment?
If bank lenders are unwilling to lend, firms will find it harder to gain access to credit so it will be more expensive to invest
- the availability of savings in the economy is determined by the amount of consumer savings.
How do government regulations encourage or discourage investment?
Tax discourages, subsidy encourages
What is called a boom in the economy?
When the economic growth is fast, but it could be inflationary or unsustainable.
How is government expenditure affected during a recession?
Governments will increase spending to try and stimulate the economy. This could involve spending on welfare benefits to help people who have lost their jobs and cutting taxes. = increase in government deficit
