Edexcel Economics 2.2

Aggregate Demand (AD)

Total level of planned real expenditure on goods and services produced within a country in a given time period.

AD = C(Consumer spending)+I(Investment)+G(Government spending)+NX(Net exports)

What causes shifts in the AD curve?

Any component of AD (C, I, G and NX)

Consumption (C)

Spending on consumer/household goods and services.

Marginal propensity to consume (MPC)

The change in spending following a change in income. The proportion of additional income that spent.

Factors affecting consumer spending (4)

1. Real disposable income

2. Employment and job security

3. Consumer and business confidence (animal spirits)

4. Interest rates

Household savings

It is disposable income that is not spent. It occurs when people decide to postpone consumption until a future time.

Factor affecting household savings (4)

1. Real interest rates

2. Consumer confidence

3. Availability of credit

4. Taxation of savings

Investment (I)

Spending on capital goods including plant, machinery and infrastructure - that increase’s an economy’s productive capacity.

Factors influencing business investment (5)

1. Actual and expected demand for goods and services

2. The cost of capital goods

3. Business taxes

4. Business confidence - animal spirits

5. Government intervention

Animal spirits

Keynes described it as a mix of confidence, mood, trust and expectations.

Government spending (G)

Money spent on multiple ares such as social protection, health and education by the government.

Budget deficit and surplus

• Budget deficit - Government spending exceeds tax revenue earned.

• Budget surplus - Government spending is less than tax revenue earned.

Exports

They are goods and services sold from one country to another. They are an injection in the circular flow of income.

Trade surplus

The value of exports is greater than the value of imports. Aggregate demand will increase