Components of Aggregate Demand

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  • Aggregrate Demand
    • Consumption (60%)
      • Consumer Confidence
        • job security and future prospects= more likely to buy more durable goods
      • is spending by households on goods & services
      • Wealth Effects
        • increase in value of assets e.g. house= feel more wealthy= spend more
      • Interest Rates
        • decreasing interest rate = less incentive to save
      • level of employment & wage rates
        • multiplier effects- more income earnt= more spend= someone else's income..
    • Investment
      • is spending by firms on capital goods
      • Interest Rates
        • decrease interest rate= costs less to borrow= more I
      • Competitors
      • Future Sales patterns & interest rates
      • Government
        • cuts in cooperation tax & relaxation of reguluations
    • Government Expenditure
      • change spending to influence AD through Discretionary Fiscal Policy
      • spend more than taxation = BUDGET DEFICIT
        • Doesn't need to be balanced in the short run
    • Net Exports (X-M)
      • Exports= goods & services out, money flowing into a country (minus imports= money flowing out
      • Change in Exchange Rates
        • stronger (increased) exchange rates= net export decrease as less competitive
          • short run= value of exports increase & import decrease- spending patterns take time to adjust
      • State of World Economy
        • if country exports dependent growth rates of others
          • e.g. Eurozone Crisis--- spending on Chinese imports falls = china growth rates fall
      • Non-price Factors
        • demand for exports & imports-- quality reliability, tariffs etc
          • Value VS Volume
  • EXCHANGE RATES= value of a currency in terms of another


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