Lecture notes 4.4.1 AD & AS model

4.4.1 AD / AS model

Changes in AD

 Total demand in the economy
 Measures spending on goods and services
 C + I + G + (X-M)



 What influences 4 components of AD
o Consumption
 The level of using economic resources
 Disposable Income
 Interest rates the level of money inputted into the economy
 Stable government
 Level of economic activity
 Capacity utilisation
 Access to credit
o Government Spending
 How much money the government invest into the economy
 Population size
 Level of tax
 Politics
 Growth
 Fiscal Policy
o Net Exports (X – M)
 The level of total imports to total exports of a country
 Balance of Payments
 Trade policies
 Exchange rates
 Foreign income
 Exchange rates
 Productivity
o Consumer spending
 How much consumers spend on goods & services

Influences on consumer spending

 Interest rates
o Low interest rates mean it's cheaper to borrow
o Reduces incentive to save therefore spending and investment increases
o Increased interest rates discourage spending more people save
o Lower interest rates lower the cost of debt more likely to pay of mortgage
 Consumer confidence
o Higher confidence levels mean consumers spend more
o Low confidence due to reasons such as unemployment makes consumers want to save

,  Capital investment
o Accounts for 15% -20% of UK GDP
o ¾ comes from private sector
o ¼ comes from the government

Influences on investment

 Rate of economic growth
o High growth means firms will make more revenue
o Higher consumer spending
o More profits to invest
o Firms will invest more
o Government politics and decisions
 Demand for Exports
o Market demand
o Higher demand more likely firms will invest
o They expect higher sales to generate more revenue
o Human intinction drives the economy
 Interest rates
o Investment increases interest rates fall
o Cost of borrowing is less
o High interest rates mean a greater opportunity cost of not saving
o High interest rates discourage investment as consumer spending falls
 Access to credit
o If banks do not want to lend, they are more risk adverse
o Firms will find it harder to access credit
o Could use retained profits
o Availability depends on level of finds in economy
o More consumers saving the more credit is available
 Government spending
o How much government spends in state goods
 NHS, Public goods & services
o Accounts for 18% - 20% of GDP
o Government spending is the 3rd largest component of AD
 Economic growth
o During recession may increase spending to stimulate the economy
o Could involve spending on welfare payments to keep people
 Fiscal policy
o Governments use to influence the economy
 Government spending & taxation
o Increase spending on public, merit goods
o Demand side policy that influences the level of AD
o Expansionary fiscal policy used in economic decline