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Section 7 - Aggregate demand - Coggle Diagram
Section 7 - Aggregate demand
Aggregate demand
Total level of planned real expenditure on the goods and services products within a country
C + I + G + (X-I)
GDP is the actual value of expenditure
Changes in AD are useful to understand short term fluctuations in a cycle
Aggregate demand curve
Rise in price level causes a contraction of AD
Fall in price level causes and expansion of AD
Why do they slope downwards
As price level rises, real value of income falls and consumers are less able to buy products, so GDP is lower
An increase in prices could mean foreign goods are cheaper so exports fall and imports rise
If price level increases, this causes inflation and a rise in interest rates on loans
Outward shift, national output increases at all price levels
Inward shift decreases national output at all price levels
Fall in AD
Fall in exports
Cut in gov spending
Higher interest rates
Decline in household wealth
Increase in AD
Depreciation of exchange rate
Cut in taxes
Increase in house prices
Lower interest rates
External shocks to AD
Large rise in the value of the exchange rate
Recession
Slump in housing market
Change in commodity prices
Consumption
Consumption - spending on consumer goods
Sources of consumer incomes - wages, savings, pensions and benefts
Marginal propensity to consumer - change in consumer spending following a change in income
Marginal propensity to save = 1 - mpc
Household spending
Saving - people postpone their consumption until a future time
Disposable income - income after taxes and benefits
Savings ratio - % if disposable income saves rather than spent
High savings ration lowers consumption and aggregate demand
Factors
Income - As dispoable income increases, consumption increases, but at a lower rate at which income increases
Interest rates - high interest rates lead to less consumer spending as there is a higher reward for saving
Consumer confidence - When consumers feel more confident about the economy, they spend more and save less.
Wealth effects - Rise in household wealth will lead to a rise in consumer spending
Tax - direct tax increase leads to a fall in disposable income so a fall in consumption
Unemployment - when unemployment rises, consumers spend less and save more as people are more worried about their jobs
Investment
Money spent by firms on assests which will be used to produce goods
Gross investment - all investment spending
Net investment - investment that increases productive capacity
Firms invest with intent of making profit in the future
Factors
Risk - high risk that firm won't benefit means its unlikely that they'll invest
Government incentives - reductions in taxes might encourage investment as they reduce firms costs
Interest rates - High interest rates mean less borrowing and less investment
Business confidence - Confident businesses will make more money
Animal spirits - Gut instinct plays an important factor in investment decisions
Government spending
Money spent by the government on public goods
Only money that directly contributes to the economy is included, pensions aren't
If AD is low, government spending might increase to increase AD and boost growth
If gs > revenue, indicates a budget deficit, and overall injection into circular flow of income
If gs < revenue, it indicates a a budge surplus and overally withdrawl from the circular flow of income
Factors
Discretionary
Schools
Infrastructure
Automatic
Unemployment
Natural disasters
Imports/ Exports
Exports - Goods produced in one country and sold in another
Imports - goods that are brougt into the country and produced elsewhere
Imports are outflow, exports are inflow
Factors
Exchange rate
Long run - value of currency increases means imports become cheaper and exports become more expensive. Strong currency reduces AD in long run
Short run - Demand won't change too much , if value of currency increases, net exports will improve in short term as overall value of exports increase and imports decreases
Change in world economy - higher a country's real income, the more it tends to import
Degree of protectionsim - Tariffs can increase exports
Non price factors like quality of goods
Multiplier
Measures relationship between an initial change in a component of aggregate demand, and the resulting larger change in the level of national income
Change in real GDP/ Change in injection
Multiplier = 1/ 1 - MPC
Positive multiplier - increase in injection causes a greater final increase in GDP
Negative multiplier - decrease in injection causes a greater final decrease in real GDP