2.2/2.3 AD/AS

Question 1

What is the AD formula

Answer 1

Consumption+investment+gov. expenditure+(exports-imports)
(C+G+I+(X-M))

Question 2

How does disposable income affect Consumer spending

Answer 2

Disposable income - More disposable income -> more spending power and consumption

Question 3

How does Business confidence affect investment

Answer 3

Business confidence: more confidence -> more investment

Question 4

How will government expenditure change with the economic cycle

Answer 4

Boom- less gov. spending
Recession- more gov. spending

Question 5

Explain how real income affects trade balance

Answer 5

Real income- More income -> more spending on imports -> lower trade balance

Question 6

How does rise in wages affect SRAS

Answer 6

Rise in wages- higher production cost-> fall in SRAS

Question 7

How does Tech advances affect LRAS

Answer 7

Tech advances- quality of capital increases-> higher LRAS

Question 8

How does inward migration affect LRAS

Answer 8

Inward migration- higher quantity of labour-> higher LRAS

Question 9

How does a change in cost of raw mats affect SRAS

Answer 9

Fall in cost of mats- lower costs-> increased SRAS

Question 10

How does a change in business tax affect SRAS

Answer 10

Fall in business tax- rise in SRAS

Question 11

How does a change in exchange rate affect SRAS

Answer 11

Exchange rate- rise in value of £-> lower business spending on imports-> rise in SRAS

Question 12

How does a change in interest rates affect consumer spending

Answer 12

Interest rates- lower interest rates -> more borrowing -> more spending
also more investment

Question 13

How does a change in saving habits affect consumer spending

Answer 13

Savings- More savings -> less consumption

Question 14

How do interest rates affect investment

Answer 14

Interest rates: lower interest rates -> more investment

Question 15

How does access to credit affect investment

Answer 15

Access to credit- easier access to credit-> easier to get loans

Question 16

How does gov. regulations/policies affect investment

Answer 16

Gov regulations- Less regulations (e.g. tax) -> more investment

Question 17

Explain how protectionism affects trade balance

Answer 17

Protectionism- higher restrictions on imported goods-> lower imports-> improved trade balance

Question 18

Explain how exchange rate affects trade balance

Answer 18

Exchange rates- Stronger pound-> imports cheaper but exports more expensive

Question 19

Explain how the state of the world economy affects trade balance

Answer 19

State of world economy- better trading partners-> more demand for exports-> better trade balance