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Lecture notes 4.4.1 AD & AS model
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These notes helped me get an A* in A Level Economics, covering all aspects of the specification, plus hints of real world context.
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4.4.1 AD / AS modelChanges 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
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