Aggregate demand

Aggregate demand

The total spending on goods and services in an economy in a period of time at a given price level

Aggregate demand consists of what components?

Consumption, investment, government spending and net exports

How is the price level calculated?

The average price of all output in the economy as measured by a price index

How might a change in income lead to a change in consumption?

Income falls - consumption falls and vice versa.

How would a change in interest rates lead to a change in consumption?

Increase in interest rates - fall in consumption and vice versa. People save instead of consume.

Income

Money that you earn

Wealth

Assets that you own

How are changes in wealth linked to changes in consumption?

If wealth increases consumers feel more confident and will spend more

How might the level of consumer confidence be linked to the levels of consumption in an economy?

Increased consumer confidence leads to increased consumption.

What might affect consumption?

Income, interest rates, wealth and consumer confidence

Interest rate

The cost of borrowing

How might a change in interest rates affect the level of investment in an economy?

Rate of interest go up - borrowing: fall in investment

saving: fall in investment, firms save instead

How could changes in the level of real GDP have an influence of the level of investment in an economy?

Real GDP^ - consumption^= buying more goods and services - firms invest in new factories, machines, land, etc. - investment^

How does business confidence affect investment?

Increased business confidence leads to increased investment

What might affect investment?

Interest rates, level of real GDP and business confidence

What might influence government spending?

Unemployment, war, if government had made a promise to support a certain industry in form of subsidies

How could changes in the real GDP of foreign countries affect exports?

If it increases there is more money to spend and exports of our good increases

How could changes in the exchange rate affect exports?

If our country becomes cheaper (lower exchange rate) then foreigners get more for their local currency so exports increase

How could changes in trade policies affect exports?

If foreign country poses tariff (import tax) then our goods are more expensive so exports go down

How could changes in inflation affect exports?

If inflation in foreign country increases, they want to buy cheaper imported goods so our exports increase

What might affect exports and imports?

Changes in the real GDP of foreign nations, exchange rate, trade policies and inflation

How might the level of a nation's imports be influenced by the level of domestic real GDP?

If our GDP increase, we have more to spend and we import more