Loading presentation...

Present Remotely

Send the link below via email or IM

Copy

Present to your audience

Start remote presentation

  • Invited audience members will follow you as you navigate and present
  • People invited to a presentation do not need a Prezi account
  • This link expires 10 minutes after you close the presentation
  • A maximum of 30 users can follow your presentation
  • Learn more about this feature in our knowledge base article

Do you really want to delete this prezi?

Neither you, nor the coeditors you shared it with will be able to recover it again.

DeleteCancel

Make your likes visible on Facebook?

Connect your Facebook account to Prezi and let your likes appear on your timeline.
You can change this under Settings & Account at any time.

No, thanks

Components of Aggregate Demand

No description
by

Hugo Flower

on 16 October 2013

Comments (0)

Please log in to add your comment.

Report abuse

Transcript of Components of Aggregate Demand

Components of Aggregate Demand
Consumption
Investment
Government Spending
Exports - Imports
Why is it downward sloping?
International Substitution Effect:
If prices are too high in the UK, people will substitute UK goods for foreign goods, increasing Imports
If prices levels rise, we can buy less with our money so we cut back on spending and real GDP falls
Remember your P's and Q's!
What affects consumer spending?
Factors Affecting Consumption
1. The interest rate
2. Confidence
3. Wealth effects - house prices, share prices etc
Remember,
C
= roughly
65%
of AD
- spending by firms
What affects the level of Investment in an economy?
Factors affecting Investment:
1. Interest rates
2. Confidence levels
3. Risk
4. Government regulations and interventions
Evaluation
4. Income levels
As real incomes rise, consumer spending should increase.
However, we have to take into account the
Marginal Propensity to Consumer (MPC)
This is the rate at which consumers will spend their income on consumption or save (withdrawal)
- The Budget
Households
Firms
Factor Inputs
Wages
Output
(goods &
services)
Expenditure
Taxes
Imports
Savings
Exports
Gov spending
Investment
Spending - Taxes
If spending is greater than taxes, this will result in an injection into the circular flow and cause AD to increase
The UK has run a
BUDGET DEFICIT
for many years
This is fine in the short run, but can cause problems if sustained
http://www.usdebtclock.org/
Fiscal Policy
- the Current Account
What affects Exports and Imports?
1. The exchange rate
2. Product competitiveness
3. Labour competitiveness
4. Global demand
5. The Propensity to Import
6. UK demand
However...
A change in the exchange rate may have an OPPOSITE effect in the SHORT RUN.
Also, the PED for imports in the UK is pretty low (inelastic).
We import a lot our products into the UK so a fall in the value of the pound may actually have a negative effect on the Current Account as spending on Imports increases.
It may take time for British firms who import raw materials to find alternative suppliers after a fall in the value of the pound.
Introducing...
Aggregate Supply
An increase in any of the components of AD will cause it to shift right. This will lead to an increase in Real GDP, but inflation may also increase.
Homework:
Prepare a presentation on the components of Aggregate Demand and their effects on the economy
Fiscal Policy:
Fiscal policy involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs
S trong
P ound
I mports
C heaper
E xports
D earer
Full transcript