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Aggregate Demand Glossary

Geoff Riley

5th May 2012

Here is a glossary of some key terms related to aggregate demand

Animal spirits
The state of confidence or pessimism held by consumers and businesses

Capital is factors of production that are used to make other goods and services, for example machinery, plant and equipment and technology.

Constant prices
Constant prices tells us that the data has been inflation adjusted

Consumer durables
Products such as washing machines that are not used up immediately when consumed and which provide a flow of services over time

The monetary value of the output of goods and services produced inside a country

Household wealth
The value of assets – including property, shares, savings and pension fund assets

Keynesian economics
The economics of John Maynard Keynes. The belief that the state can directly stimulate demand in a stagnating economy. For instance, by borrowing money to spend on public works projects like roads, schools and hospitals.

Multiplier effect
If there is an initial injection (e.g. a rise in exports) into the economy then the final increase in AD and Real GDP will be greater.

Negative equity
When the value of an asset falls below the debt left to pay on that asset. Term is most commonly used in connection with property prices and mortgages

Nominal means the money value of something, for example the money value of a weekly wage unadjusted for the effects of inflation

Nominal GDP
This is the monetary value of all goods and services expressed at current prices

Paradox of thrift
If people save more, it will reduce consumption, thus aggregate demand will fall, impeding economic growth and, in fact, lowering the general level of savings

Precautionary saving
Saving because of fears of a loss of real income or employment

Real disposable income
Income after taxes and benefits, adjusted for the effects of inflation

Real wage
The nominal wage adjusted for the effects of inflation

Saving ratio
The percentage of disposable income that is saved rather than spent

A leakage from the circular flow of income (savings, taxation and imports)

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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