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COMPONENTS OF AGGREGATE DEMAND (GOVERNMENT SPENDING (gov uses FISCAL…
COMPONENTS OF AGGREGATE DEMAND
AD =
C
ONSUMPTON +
I
NVESTMENT +
G
OVERNEMNT SPENDING + (E
X
PORTS - I
M
PORTS)
CONSUMPTION
LARGEST component, sound 70%
total amount spent by HOUSEHOLDS
INCREASE in C means an INCREASE in AD and vice versa
factors affecting
Consumption and Saving
INTEREST RATES
high IR = less spending more saving as take advantage of high IRD
CONSUMER SPENDING
more confidence about economy and their personal financial status = more spending
INCOME
income INC = consumption INC
income DEC = consumption DEC
WEATH AFFECT
inc household wealth (rise in share P£ or house P£) = spend more save less
TAXES
direct tax inc = spend less
indirect tax inc = inc C£ spending, consumers reduce consumption, inc consumer spending
UNEMPLOYMENT
unem INC = consumers spend less and save more
unem DEC = ppl have more money, consumer confidence regained
INVESTMENT
made by FIRMS
GROSS
INVESTMENT
-
includes all investment spending
NET
INVESTMENT
-
ONLY includes investment that INCREASES PRODUCTIVE CAPACITY
firms invest with INTENTION of making profit in FUTURE
factors affecting
investment
RISK
high risk = unlikely to invest as money back isn't guaranteed
GOV INCENTIVE AND REGULATIONS
gov incentive such as
SUBSIDIES
in tax can affect LEVEL of INVESTMENT
e.g. REDUCTION in corporation tax may ENCOURAGE firms to INVEST as they'll have MORE funds to do so
INTEREST RATES AND ACCESS TO CREDIT
firms BORROW money, so if IR is HIGH they can't borrow money, so INVESTMENT is low
TECHNICAL ADVANCES
investment will RISE when tech ADVANCES are made
BUSINESS CONFIDENCE AND ANIMAL SPIRITS
more confidence = more investment
Keynes
said decisions are also made on emotions
GOVERNMENT SPENDING
DOESN'T include TRANSFER of money
gov spending DOESNT have to be EQUAL to REVENUE
if gov SPENDING is
GREATER
than REV, will be a
BUDGET DEFICIT
if gov SPENDING is
LESS
than REV, will be a
BUDGET SURPLUS
gov uses
FISCAL POLICY
to alter
spending and tax to influence AD
AD low and economic growth is SLOW, gov may
overspend
causing a budget
DEFICIT
AD high and economy experiencing a BOOM, gov may INC tax and SPEND LESS causing a
SURPLUS
to reduce AD and slow down economics growth
NET EXPORTS
export from one country always an import to another
EXPORTS are
injections
IMPORTS are
withdrawals
factors that affect
imports
and
exports
EXCHANGE RATE
long run
- value of currency inc, imports becomes cheaper and exports become more expensive
short run
- demand for imports and exports are inelastic, have on close substitutes, value of currency inc=net exports improve as value of exports inc and value of imports dec
CHANGE IN STATE OF WORLD ECONOMY
higher countries real Y, more it tends to import, so net export fall as real Y rises
chain affect, one country suffers we all suffer as we all TRADE with eacother
DEGREE OF PROTECTIONISM
tariffs and quotas can inc net exports by reducing imports
industries protected by international competition have less incentive to become more efficient so will export less in the long run
NON-P£ FACTORS
quality of the goods, people are willing to pay more for a high quality good