2.2 - Aggregate Demand

define consumption

total spending on goods + services by households in the economy

define MPC

• marginal propensity to consume

• for how much each extra pound earnt is spent on consumption

define investment

total spending of capital goods by firms (machinery, tech)

what is a time lag?

delay between the implementation of a policy and when the full intended effect is felt in the economy

define accelerator effect

when an increase in demand leads to a proportionately larger increase in investment by firms

what happens when exchange rates are low?

• imports are more expensive

• exports become cheaper

• net exports rise

• AD increases- outward shift

what happens when exchange rates are strong?

• exports become more expensive

• imports become more cheaper

• net exports decrease

• AD is lower- inward shift

define savings

The portion of disposable income consumers don’t spend on consumption

factors affecting savings

• level of disposable income

• interest rates

• consumer confidence

  • age stricture of population (young spend more, middle age save more for their future and children)

factors affecting investment

• interest rates “MPI increases with low rates”

• business confidence

• cooperation tax. lower- more profit to invest more

• spare capacity- lots then lower MPI

• level of competition

Factors affecting consumption

• incomes

• interest rates

• consumer confidence

• asset prices