Studied by 22 people
Household consumption (C) accounts for ____ of AD
60%
Government spending (G) accounts for ____ of AD
25%
Investment (I) accounts for ____ of AD
15%
Net exports (X-M) accounts for ____ of AD
1%
Why is AD drawn as a downard slope? (name 3 reasons)
The real balance effect, investment, interest rate effect
What is the real balance effect?
As prices rise, more money is needed to get the same amount of goods
What is the interest rate effect?
If prices are high consumers will borrow more, as there is a fixed supply of money interest rates go up and rise in interest rate makes spending fall
What is the investment effect
higher interest rates = less profitable investments therefore number of investments fall
A change in the average price level will cause a ______ ____ the AD curve
movement along
A change in the value of the components of AD will cause a _____ of the curve
shift
What is disposable income?
The income that an individual receives after having paid any direct taxes and received any transfer payments/benefits
Generally as consumers save more they _____ ____
spend less
What is the (household) savings ratio?
It provides an idea of the average extent of saving for all households in the economy
How is the household savings ratio calculated?
As the percentage of disposable income that is saved
Do a rise in interest rates increase or decrease the incentive to save?
They increase the incentive, consumers subsitute spending for saving
Why are people more likely to save/less spend less? (2 reasons)
Return on savings increases, cost of buying on credit increases
How would the rise of interest rates effect the housing market?
May lead to a fall in average house prices as demand for houses falls because of the increased cost of taking out a mortgage - negative wealth effect
How does consumer confidence influence consumption?
If consumers aren’t confident in spending their money e.g. they are worried about losing a job, they will spend less - consumption may decrease
How does the wealth effect affect consumption?
actual changes in the economy can cause real spending increases (or decreases) - people may decide to trade in their increased wealth or it may just boost confidence
What is gross investment?
It is the total level of expenditure by firms on capital equipment before depreciation is taken into account
What is net investment?
Net investment accounts for the deprecation of capital (Net investment = Gross investment - capital depreciation)
Name 3 influences on levels of investment
Interest rates, availability of credit, business confidence
How do interest rates effect investment?
Some capital spending is financed by borrowing e.g. Loans - only few projects will be viable if cost of credit is high
How does availability of credit affect investment?
Banks may not be willing to lend to firms (‘credit crunch’)
Define the term ‘animal spiritis’
where entrepeneurs, encouraged by a rising market, tended to take too many risks
How does business confidence affect investment?
When animal spirits are strong, invetment is sufficient to maintain AD and vice versa (lack of investment can cause the economy to lapse into a depression)
Name both types of Government spending
Automatic and discretionary
What’s automatic spending?
Government spending which is non-discretionary and influenced by the business cycle e.g. JSA rises in a recession
What is discretionary spending?
The spending that the government may choose to change as part of its fiscal policy
Government spending is affected by the _____ cycle
trade
Note 
Flashcard (85)