10.4 Aggregate Demand And The Level Of Economic Activity

Question 1

What is economic activity

Answer 1

The production and consumption of goods and services in the economy together with the employment of labour, capital and other inputs that produce outputs

Question 2

What is the link between AD and employment?

Answer 2

When real output increases firms have to employ more workers to produce additional goods

Question 3

Diagram for affect of AD on real output

Answer 3

Question 4

Describe this diagram

Answer 4

Illustrates the effect of an increase of AD on real output

Increase leads to a rise and decrease leads to a fall

Important to note:

The greater the shift in AD the greater the change in real output

The extent to which AD changes also depends on the AS curve

Question 5

Multiplier def

Answer 5

The relationship between a change in AD and the resulting generally larger change in National income

Question 6

What does the national income multiplier measure?

Answer 6

The relationship between an initial change in a component of AD such as gov spending or private-sector investment and the resulting generally larger change in the level of national income

Question 7

Diagram for a national income multiplier on an AS/AD diagram

Answer 7

Question 8

Describe this diagram

Answer 8

Gov spending shifts AD1 to AD2 then triggers multiplier process leading to AD3

The eventual size of AD is 2.5X initial gov spending

Question 9

Equation for a multiplier?

Answer 9

Change in national income/change in gov spending

Question 10

What is the marginal propensity to consume ?t

Answer 10

The fraction of ant increase in income which people plan to spend on the consumption of domestically produced goods and services

Question 11

What is the marginal prosperity to save?

Answer 11

The fraction of ant increase in income which people plan to save rather than spend

Question 12

Besides the gov spending multiplier what are the other multipliers

Answer 12

Investment multiplier
Tax multiplier
Export multiplier
Import multiplier

Question 13

What are gov spending multiplier and tax multipliers known as?

Answer 13

Fiscal policy multipliers

Question 14

What are export and import multipliers known as?

Answer 14

Foreign trade multipliers

Question 15

Are there just national multipliers ?

Answer 15

No there are regional too

Question 16

What is the formula for calculating a multiplier

Answer 16

Question 17

What does higher MPC mean ?

Answer 17

At each stage of the multiplier process most new income is spent on consumption and only a small amount in savings

Question 18

What does a low MPC and high MPs produce

Answer 18

The eventual growth in income is not much larger than the initial increase in AD

Question 19

Describe the multiplier process

Answer 19

10 billion in gov spending

Received by building workers consumption rate 0.2 0.8 is not spent on consumption

Question 20

The eventual increase of income resulting from gov spending =

Answer 20

Sum of all the stages of income generation

Question 21

Equation for national nominal income

Answer 21

National real income X average price level

Question 22

What does the size of the multiplier depend on? And why

Answer 22

If we are measirijg nominal national income multiplier or the real national income
multiplier

Because part of the multiplier effect deflects into a rising price level so the growth of real income is restricted from y1 to y2