2.2/ 2.3 AS & AD Flashcards
what is the formula for aggregate demand?
AD= C+I+G+ (X-M)
what is aggregate demand?
total amount of planned spending on goods and services at a given price level in an economy within a year
why is the AD curve a downward sloping curve?
the real balance effect, the international trade effect, the interest rate effect
what is the real balance effect?
price level rises, purchasing power of cash assets falls, leads to decrease in demand for real outputs
what is the international trade effect?
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
what is the interest rate effect?
higher price level results in an increased demand for money, interest rates rise, reducing consumption and investment so causing a contraction in AD.
what factors affect consumer spending?
disposable income, rate of savings, interest rates, consumer confidence, wealth
how does rate of savings affect consumer spending?
as consumers spend more, they will spend less
how does disposable income affect consumer spending?
more disposable income means that consumers are more likely to increase their spending
how does interest rates affect consumer spending?
higher interest rates increase the cost of borrowing , reducing disposable income and therefore limit growth in consumer spending
how does consumer confidence affect consumer spending?
high level of consumer confidence will encourage a higher marginal propensity to consume
how does wealth affect consumer spending?
consumers tend to spend more when they are wealthier
what is investment?
increase in the capital stock, referred to as gross fixed capital formation
what is gross investment?
refers to the total expenditure on new capital goods
what is net investment?
new additions to capital stock after taking into account the fall in value of capital assets
what factors influence investment?
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
how does the rate of economic growth influence investment?
if increase in GDP then firms will need more capital to meet the increased demand, increase in real GDP causes investment to rise
how does business expectations and confidence influence investment?
if firms expect to sell more in the future they are likely to invest today
how does ‘animal spirits’ influence investment?
animal spirits used to describe the instincts and emotions that may determine whether or not firms decide to invest,rather than intrinsic value
how does demand for exports influence investment?
higher investment increases a countries’ productive capacity which then increases potential for exports
how does interest rates influence investment?
interest rates and bonds have an inverse relationship, fixed rate of interest they pay typically is more attractive to investors
how does access to credit influence investment?
more access to credit means that more investment can occur
how does government regulations influence investment?
by restricting inputs, that can be used in production process, regulations shape the economy
what is the trade cycle?
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
How does fiscal policy influence government expenditure?
Expansionary fiscal policy means higher government spending and lower taxes, contractionary fiscal policy means cutting government spending
What is net trade?
Calculated by deducting the value of imports from the value of exports
What are influences to net trade?
Weal income, exchange rates, state of the world economy, degree of protectionism, non-price factors
How does real income influence net trade?
Increase in real income will cause the demand for goods and services to increase
How does exchange rates influence net trade?
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
How does the state of the world economy influence net trade?
Increase in the amount of revenue gained from exports, improving net trade balance
How does the degree of protectionism influence the net trade?
Will reduce demand of exports and therefore exports revenue decreases, high tariffs or other restrictions on trade
How do non-price factors influence net trade?
Quality and design, reliability, after sales service, transport cost
What is aggregate supply?
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
What can cause a movement along the AS curve?
Change in price level caused by factors not related to AS, e.g an increase in consumption would cause an expansion in AS
What can cause a shift in the AS curve left?
Costs of production rising, e.g oil prices rise, causing a rise in the production costs of firms
What causes a shift right in the AS curve?
Costs of production fall, e.g increase in productivity
What influences SRAS?
Change in cost of raw materials, change in exchange rates, change in tax rates, change in the level of tariffs
How does change in the cost of raw materials influence SRAS?
Costs of electricity rises, cost of production increase, AS decrease (shift left)
How does change in exchange rates influence SRAS?
If exchange rate of pound increases against other currencies, imports cheaper LRAS increases
How does a change in tax rates influence SRAS?
Reduction in employers’ national insurance contributions costs of firms fall (shift right)
How does a change in the level of tariffs influence SRAS?
Country increases tariffs then cost for domestic firms rise (shift left)
What factors influence LRAS?
Technological advances, relative productivity changes, education and skills changes, changes in government regulations, demographic changes and migration, competition policy, changes in the minimum wage
How does technological advances influence LRAS?
New robotics technology, reduce cost for firms (shift right)
How does relative productivity changes influence LRAS?
Improvement in productivity (shift right)
How does education and skills changes influence LRAS?
If more people are well educated then LRAS increase
How does changes in government regulations influence LRAS?
Government introduces laws to reduce environmental pollutions, LRAS may shift left if the laws cause a reduction in the productive potential of the economy
How does demographic changes and migration influence LRAS?
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
How does competition policy influence LRAS?
Government makes new laws to make it easier to set up a business, LRAS increase
How do changes in minimum wage influence LRAS?
Increase in minimum wage increase cost for firms, however can motivate workers more resulting in a higher productivity
