2.2/2.3 AD/AS Flashcards
What is the AD formula
Consumption+investment+gov. expenditure+(exports-imports)
(C+G+I+(X-M))
How does disposable income affect Consumer spending
Disposable income - More disposable income -> more spending power and consumption
How does Business confidence affect investment
Business confidence: more confidence -> more investment
How will government expenditure change with the economic cycle
Boom- less gov. spending
Recession- more gov. spending
Explain how real income affects trade balance
Real income- More income -> more spending on imports -> lower trade balance
How does rise in wages affect SRAS
Rise in wages- higher production cost-> fall in SRAS
How does Tech advances affect LRAS
Tech advances- quality of capital increases-> higher LRAS
How does inward migration affect LRAS
Inward migration- higher quantity of labour-> higher LRAS
How does a change in cost of raw mats affect SRAS
Fall in cost of mats- lower costs-> increased SRAS
How does a change in business tax affect SRAS
Fall in business tax- rise in SRAS
How does a change in exchange rate affect SRAS
Exchange rate- rise in value of £-> lower business spending on imports-> rise in SRAS
How does a change in interest rates affect consumer spending
Interest rates- lower interest rates -> more borrowing -> more spending
also more investment
How does a change in saving habits affect consumer spending
Savings- More savings -> less consumption
How do interest rates affect investment
Interest rates: lower interest rates -> more investment
How does access to credit affect investment
Access to credit- easier access to credit-> easier to get loans
How does gov. regulations/policies affect investment
Gov regulations- Less regulations (e.g. tax) -> more investment
Explain how protectionism affects trade balance
Protectionism- higher restrictions on imported goods-> lower imports-> improved trade balance
Explain how exchange rate affects trade balance
Exchange rates- Stronger pound-> imports cheaper but exports more expensive
Explain how the state of the world economy affects trade balance
State of world economy- better trading partners-> more demand for exports-> better trade balance
