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    IB Economics Chap 14 - Aggregate Demand

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    thayanelaurea
    Summary of Chapter 14 - Aggregate demand of the IB Economics coursebook.

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    IB Economics Chap 14 - Aggregate Demand

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    thayanelaurea
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    Summary of Chapter 14 - Aggregate demand of the IB Economics coursebook.

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    IB Economics Chap 14 - Aggregate demand

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    Summary of Chapter 14 - Aggregate demand of the IB Economics coursebook.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1 views11 pages

    IB Economics Chap 14 - Aggregate Demand

    Uploaded by

    thayanelaurea
    Summary of Chapter 14 - Aggregate demand of the IB Economics coursebook.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 11

    AGGREGATE DEMAND

    CHAPTER 14
    distinguish between demand and aggregate
    demand (AD)
    Learning define and illustrate AD
    define and describe the components of AD

    Objectives explain the determinants of the components of AD


    illustrate shifts of the AD curve
    explain how governments can use monetary and
    fiscal policy to alter the level of AD in an economy
    explain the nature of a government budget
    AGGREGATE DEMAND
    aggregate demand: the total spending on goods and services in a period of time at a given price level

    the demand and AD curves look similar in that


    they’re both downward sloping, but the AD
    takes into account the average price level of
    the entire economy
    diff lies on the axes: y-axis for AD is the avg
    price level all goods and services in the
    economy, and the x-axis constitutes the
    economy’s entire output
    however, intuition remains: the downward
    slope illustrates the inverse relationship
    between output and price level of the economy
    THE COMPONENTS OF AGGREGATE DEMAND
    AD = C + I +G + (X-M)
    CONSUMPTION
    total spending of households on goods and services produced domestically
    goods that are both durable - used more than once (e.g. cars, appliances and clothes) - and non-durable
    ones (e.g., food items and diapers)

    INVESTMENT
    the addition of capital stock into the economy by private firms
    investment can take the form of buying new machinery or investing in training for workers
    main objective: increase productivity and output

    GOVERNMENT SPENDING
    total spending by the govt on goods and services such as public schooling, housing and healthcare
    the govt will increase or decrease its spending depending on the macro objectives it is trying to achieve

    NET EXPORTS (X-M)


    exports: domestic production bought by foreigners; imports: foreign production bought by local households,
    firms and the govt; net exports is X-M, or revenue from imports minus expenditure on exports
    CHANGES IN AGGREGATE DEMAND

    changes in the price level: these result in


    movement along the AD
    changes in the components of AD: these cause
    shifts in the AD to either the left (fall) or right
    (rise)
    what causes these changes? NEXT SLIDE
    CHANGES IN CONSUMPTION (C)
    CHANGES IN INCOME
    disposable income is the income households have after paying tax
    the larger that income, the more people will spend on goods and services

    CHANGES IN THE RATE OF INTEREST


    interest rate is the cost/price of borrowing and the reward for saving; meaning that the higher the
    rate, the less people will borrow and the more they will save
    people borrow money from to purchase expensive durable goods such as houses and cars, and
    when the loan is repaid, interest is charged (that’s how banks make money)

    CHANGES IN WEALTH
    income does not equal wealth; income is money people earn and wealth is the value of the assets people
    own
    two main factors affect wealth: changes in house prices and stocks - when these rise, people become
    wealthier and feel comfortable spending more and saving less
    CHANGES IN CONSUMPTION (C)... PT 2
    CHANGES IN CONSUMER CONFIDENCE
    the more optimistic people are about the future, the more they will spend
    this optimism may surround both micro matters (i.e. the expectation of a promotion) or macro ones (i.e. the
    expectation that economic conditions will improve )

    HOUSEHOLD INDEBTEDNESS
    indebtedness = current debt
    individuals who have unpaid loans may not feel comfortable in taking out further ones
    also, if interest rates increase, creditors will have to pay more interest back, and that may dissuade
    borrowing
    CHANGES IN INVESTMENT (I)
    CHANGES IN THE RATE OF INTEREST
    like households, firms borrow to finance expenditure, typically on investment
    the same logic applies: higher interest rates dissuade borrowing while simultaneously encouraging
    saving - firms save too! (this is known as retained earnings)

    CHANGES IN THE LEVEL OF NATIONAL INCOME


    if national income increases, investment will increase as well
    why? because consuption will increase, meaning that more output will be demanded from firms
    firms then invest in expansions and new and more advanced machinery to keep up with demand - induced
    investment

    TECHNOLOGICAL CHANGE
    advances in tech force firms to keep up by means of continuous investments

    EXPECTATIONS/BUSINESS CONFIDENCE
    if economic prospects are good, firms will invest more in order to take advantage of the favourable
    conditions
    CHANGES IN NET EXPORTS (X-M)
    (X)
    a rise in foreign incomes will likely result in an increase in X
    high inflation rates abroad (relative to home country) means that domestic production will be more
    price competitive
    low exchange rates also make domestic production more affordable abroad
    if trade policies shift in favour of X (i.e. duty taxes are cut), X will increase

    (M)
    a rise in domestic income means people can afford foreign goods more easily
    as income rises, investment may rise too, and firms may source this investment from abroad (i.e. a
    Dubai clinic may purchase MRI machines from Siemens in Germany)
    again, rises in the forex rate make imports less expensive and hence more attractive
    and again, if the domestic country chooses to scrap duty taxes, imports will become cheaper and
    more affordable to the local population
    GOVT & AD - FISCAL POLICY

    EXPANSIONARY FISCAL POLICY


    fiscal policy: the set of govt policies relating to its spending and taxation rates
    taxes can be direct - taxes on earnings and profits (i.e. income and corporate taxes) or
    indirect - taxes on expenditure (i.e. VAT, duty taxes)
    taxes are instruments used by govts to manipulate spending - if they want to increase
    spending, they’ll cut taxes, if they want to decrease it, they’ll raise them
    lower taxes also stimulate investment by firms
    GOVT & AD - MONETARY POLICY
    monetary policy: the set of govt policies relating to the level of money supply and interest and
    exchange rates
    banks are free to decide their own interest rate, so govts influence these rates by setting the base
    rate - the rate at which the central bank (CB) charges commercial banks for loans
    in order to increase AD, the govt (by means of the CB) will use expansionary monetary policy, such
    as lowering interest rates and increasing the money supply

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