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Economics 2.2.1

Economics- Edexcel 2.2.1

QuestionAnswer
aggregate demand total planned real expenditure on goods and services produced within a country in each period
Components of aggregate demand household/consumer spending on goods and services, Gross Fixed Capital Investment Spending and the Value of the Change in Stocks, Government spending on public services, exports of goods and services, imports of goods and services
AD aggregate demand
C household/consumer spending on goods and services
I Gross Fixed Capital Investment Spending and the Value of the Change in Stocks
G Government spending on public services
X exports of goods and services
M imports of goods and services
Formula for AD C+I+G+(X-M)
Largest component of AD for UK consumer spending
Smallest component of AD for UK gross investment spending
Aggregate demand curve shows relationship between aggregate demand and the general price level
Movements to the left along the aggregate demand curve rise in the general price level causes a contraction of AD
Movements to the right along the aggregate demand curve fall in the general price level causes and expansion of AD
Why the AD curve slopes downwards- the real income effect as the price level falls, the real value of income rises and consumers can buy more
Real money balance effect other name real income effect
Real income effect the resultant change in demand for a good or service caused by an increase or decrease in a consumer's purchasing power or real income
Why the AD curve slopes downwards- balance of trade effect a fall in the relative price level of country X could make foreign-produced goods and services more expensive, causing a rise in export and a fall in imports so the trade balance improves because of a change in the price level
Why the AD curve slopes downwards- interest rate effect if price inflation is low this leads to a reduction in interest rates so there is less incentive to save and the exchange rate may depreciate and export sales will improve
Outward shift of AD raises national output at all price levels
Inward shift of AD reduces national output at all price levels
Reasons for a fall in AD fall in net exports/ cut in the real level of government spending / higher interest rates / fall in the supply of credit from the banking system / decline in household wealth and confidence
Reasons for a rise in AD depreciation in the value of the exchange rate / cuts in the rate of direct and indirect taxes / increase in house prices and share prices / expansion of supply of credit and lower interest rates
External shocks an unexpected event that dramatically changes an entire economy's direction, either upward (value gains and job creation) or downward (value lost and job destruction)
Created by: jessharris
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