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7 Cards in this Set

  • Front
  • Back
Where does equilibrium occur?
Where AE (aggregate expenditure) equals AS
What does the Keynesian expenditure model show?
It shows the economies natural tenedancy towards equlibrium.
AE equation
AE = C + I + G + (X - M)
Components of AE & % they make up
volatile or stable
Consumption - 60 % stable
Govt. Expenditure 25 % stable
Private Investment 14 - 23% volatile
Net Exports -2% stable
Factors influencing consumption expenditure
Hint: 6
1. Disposable Y - spend more when Y is higher
2. Expectations - interest rates, Ue - positive or negative confidence affects spending patterns
3.Interest rates - fall, people have more to spend
rise, repayments increase & less to spend
4. Personal wealth - people spend more when the value of their assets rise
Govt. Policy - fiscal affects Yd thru taxation measures, monetary affects interest rates and cost of credit
Distribution of income - how income is spread thru the community e.g. old age pensions
Factors influencing investment expenditure
Hint: 5
1. Rate of interest - real rate rises = investment falls. real rate falls = investment rises
2. Business expectations - take on current activity, influenced by retail slaes etc.
3. Profitability - retain profits for expansion, increased productivity & profitability thru new capital equipment
4. Govt policy - govt invest in infrastructure & provide incentives
5. risk - investments rise or fall through percieved risk. Greater risk - smaller investment levels.
Factors influencing govt expenditure
Hint: 2
1. welfare payments - vary due to economic conditions
2. cyclical fluctuations - spend more in a trough