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Economics > 2.2/ 2.3 AS & AD > Flashcards

2.2/ 2.3 AS & AD Flashcards

1
Q

what is the formula for aggregate demand?

A

AD= C+I+G+ (X-M)

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2
Q

what is aggregate demand?

A

total amount of planned spending on goods and services at a given price level in an economy within a year

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3
Q

why is the AD curve a downward sloping curve?

A

the real balance effect, the international trade effect, the interest rate effect

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4
Q

what is the real balance effect?

A

price level rises, purchasing power of cash assets falls, leads to decrease in demand for real outputs

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5
Q

what is the international trade effect?

A

rise in the price level causes a decrease in the international competitiveness of the UK, decrease in demand for exports and rise in demand for imports, contraction of AD

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6
Q

what is the interest rate effect?

A

higher price level results in an increased demand for money, interest rates rise, reducing consumption and investment so causing a contraction in AD.

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7
Q

what factors affect consumer spending?

A

disposable income, rate of savings, interest rates, consumer confidence, wealth

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8
Q

how does rate of savings affect consumer spending?

A

as consumers spend more, they will spend less

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8
Q

how does disposable income affect consumer spending?

A

more disposable income means that consumers are more likely to increase their spending

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9
Q

how does interest rates affect consumer spending?

A

higher interest rates increase the cost of borrowing , reducing disposable income and therefore limit growth in consumer spending

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10
Q

how does consumer confidence affect consumer spending?

A

high level of consumer confidence will encourage a higher marginal propensity to consume

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11
Q

how does wealth affect consumer spending?

A

consumers tend to spend more when they are wealthier

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12
Q

what is investment?

A

increase in the capital stock, referred to as gross fixed capital formation

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13
Q

what is gross investment?

A

refers to the total expenditure on new capital goods

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14
Q

what is net investment?

A

new additions to capital stock after taking into account the fall in value of capital assets

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15
Q

what factors influence investment?

A

rate of economic growth, business expectations and confidence, keynes and animal spirits, demand for exports, interest rates, access to credit, influence of government, government regulations

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16
Q

how does the rate of economic growth influence investment?

A

if increase in GDP then firms will need more capital to meet the increased demand, increase in real GDP causes investment to rise

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17
Q

how does business expectations and confidence influence investment?

A

if firms expect to sell more in the future they are likely to invest today

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18
Q

how does ‘animal spirits’ influence investment?

A

animal spirits used to describe the instincts and emotions that may determine whether or not firms decide to invest,rather than intrinsic value

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19
Q

how does demand for exports influence investment?

A

higher investment increases a countries’ productive capacity which then increases potential for exports

20
Q

how does interest rates influence investment?

A

interest rates and bonds have an inverse relationship, fixed rate of interest they pay typically is more attractive to investors

21
Q

how does access to credit influence investment?

A

more access to credit means that more investment can occur

22
Q

how does government regulations influence investment?

A

by restricting inputs, that can be used in production process, regulations shape the economy

23
Q

what is the trade cycle?

A

fluctuations in GDP around the long-run trend in economic growth, downturn in economic growth, government expenditure is higher, government automatically spends more in a recession, government automatically spends less in a boom

24
Q

How does fiscal policy influence government expenditure?

A

Expansionary fiscal policy means higher government spending and lower taxes, contractionary fiscal policy means cutting government spending

25
Q

What is net trade?

A

Calculated by deducting the value of imports from the value of exports

26
Q

What are influences to net trade?

A

Weal income, exchange rates, state of the world economy, degree of protectionism, non-price factors

27
Q

How does real income influence net trade?

A

Increase in real income will cause the demand for goods and services to increase

28
Q

How does exchange rates influence net trade?

A

When a counties exchange rate increases relative to another countries, price of goods and services increase, imports are cheaper, can decrease countries exports and increase imports

29
Q

How does the state of the world economy influence net trade?

A

Increase in the amount of revenue gained from exports, improving net trade balance

30
Q

How does the degree of protectionism influence the net trade?

A

Will reduce demand of exports and therefore exports revenue decreases, high tariffs or other restrictions on trade

31
Q

How do non-price factors influence net trade?

A

Quality and design, reliability, after sales service, transport cost

32
Q

What is aggregate supply?

A

Total amount of goods and services that all firms in the economy are willing to supply at a given price level in an economy in a year

33
Q

What can cause a movement along the AS curve?

A

Change in price level caused by factors not related to AS, e.g an increase in consumption would cause an expansion in AS

34
Q

What can cause a shift in the AS curve left?

A

Costs of production rising, e.g oil prices rise, causing a rise in the production costs of firms

35
Q

What causes a shift right in the AS curve?

A

Costs of production fall, e.g increase in productivity

36
Q

What influences SRAS?

A

Change in cost of raw materials, change in exchange rates, change in tax rates, change in the level of tariffs

37
Q

How does change in the cost of raw materials influence SRAS?

A

Costs of electricity rises, cost of production increase, AS decrease (shift left)

38
Q

How does change in exchange rates influence SRAS?

A

If exchange rate of pound increases against other currencies, imports cheaper LRAS increases

39
Q

How does a change in tax rates influence SRAS?

A

Reduction in employers’ national insurance contributions costs of firms fall (shift right)

40
Q

How does a change in the level of tariffs influence SRAS?

A

Country increases tariffs then cost for domestic firms rise (shift left)

41
Q

What factors influence LRAS?

A

Technological advances, relative productivity changes, education and skills changes, changes in government regulations, demographic changes and migration, competition policy, changes in the minimum wage

42
Q

How does technological advances influence LRAS?

A

New robotics technology, reduce cost for firms (shift right)

43
Q

How does relative productivity changes influence LRAS?

A

Improvement in productivity (shift right)

44
Q

How does education and skills changes influence LRAS?

A

If more people are well educated then LRAS increase

45
Q

How does changes in government regulations influence LRAS?

A

Government introduces laws to reduce environmental pollutions, LRAS may shift left if the laws cause a reduction in the productive potential of the economy

46
Q

How does demographic changes and migration influence LRAS?

A

Demographic changes have direct effect on supply, skills and cost of labour. Migration has a specific demographic effect in that if many immigrants are working age then LRAS increase

47
Q

How does competition policy influence LRAS?

A

Government makes new laws to make it easier to set up a business, LRAS increase

48
Q

How do changes in minimum wage influence LRAS?

A

Increase in minimum wage increase cost for firms, however can motivate workers more resulting in a higher productivity

Economics (20 decks)

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