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Economics Theme 2 > 2.2 AD > Flashcards

2.2 AD Flashcards

1
Q

Define Aggregate Demand (in words)

A

The total amount of spending on goods and services produced in an economy during a period of time

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2
Q

Define Consumption

A

Total household spending

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3
Q

Define disposable income

A

The income that households have to spend on consumption and saving after having paid taxes

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4
Q

Define average propensity to consume

A

The proportion of income spent on consumption

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5
Q

Define marginal propensity to consume

A

The proportion of additional income spent on consumption (change in spending following a change in income)

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6
Q

Define average propensity to save/savings ratio

A

Proportion of income saved by households

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7
Q

Define savings

A

Household disposable income that is not spent

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8
Q

Define marginal propensity to save

A

The proportion of an increase in disposable income that households save

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9
Q

Define the wealth effect

A

An increase in spending as a result of real or perceived increase in wealth

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10
Q

Define investment

A

Expenditure undertaken by firms and the government on capital goods

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11
Q

Define interest rate

A

The cost of borrowing, or the reward for saving

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12
Q

Define depreciation

A

The fall in value of physical capital goods over time due to wear and tear

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13
Q

Define net investment

A

Gross investment minus depreciation

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14
Q

Define components

A

A good used to make another good or a semi-finished good, a form of capital

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15
Q

Define the aggregate demand curve

A

The relationship between the level of AD and the overall price level, showing planned expenditure at any given general price level

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16
Q

What happens to consumption if real income increases?

A

Consumption increases

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17
Q

How do you calculate AD from its components?

A

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

18
Q

Name 5 causes of a fall in AD

A 
Decline in household wealth
Higher interest rates
Cuts in government spending
Fall in exports
Increase in imports
19
Q

Name 4 things that would cause an increase in AD

A

Increase in house prices
Lower interest rates and better credit
Cuts in direct and indirect taxes
Depreciation of the exchange rate

20
Q

How do you calculate real disposable income?

A

Real income - tax + benefits

21
Q

What happens to consumption if savings increase?

A

There is less money available for consumption

22
Q

What does a high savings ratio mean for consumption, and therefore AD?

A

Lower consumption -> Lower AD

23
Q

Formula for APC

A

Consumption/Income x 100

24
Q

Formula for the savings ratio

A

Savings/Income x 100

25
Q

What happens to consumption and savings when interest rates rise, and why?

A

Consumption falls and savings rise because cost of borrowing and reward for saving has increased

26
Q

Define asset

A

Things owned by individuals/households that have value

27
Q

Name 5 main influences of investment

A

Rate of economic growth

Confidence levels

Interest rates

Animal spirits

Risk

Access to credit

Gov. decisions and bureaucracy

28
Q

When is investment logical?

A

If businesses are working at full capacity and expect demand to rise in the future

29
Q

What do business potentially face if they use past profits to fund investment?

A

Opportunity cost

30
Q

Define fiscal policy

A

Any decision that affects government spending/taxes

31
Q

Define government expenditure

A

Government spending on public goods and services e.g NHS

32
Q

What are the 2 main influences of government expenditure?

A

The trade cycle and fiscal policy

33
Q

Name 3 elements of gov. expenditure

A

Welfare protection

Health (the NHS)

Education

34
Q

What is a budget deficit?

A

When gov. expenditure > tax

35
Q

Can the government spend more than they earn in the short run, or the long run?

A

Only short run - otherwise lots of national debt is accumulated

36
Q

What does a budget deficit/surplus do to AD?

A

Deficit - AD increase

Surplus - AD contract

37
Q

What happens to gov. expenditure in a recession?

A

Increases as more areas need more funding, e.g social welfare and education

38
Q

What is expansionary fiscal policy? and 2 examples of how it is applied

A

When G > T

e.g tax cuts, spending on infrastructure

39
Q

What is expansionary fiscal policy and give 2 examples of how it is applied

A

When G > T

e.g tax cuts, spending on infrastructure

40
Q

What is contractionary fiscal policy and give 2 examples of how it is applied

A

When G < T

e.g raising taxes, reducing benefits

41
Q

Name 6 factors affecting the volume of exports

A

Economic cycle

Exchange rate

Quality of goods

Productivity

Relative inflation

Protectionism

42
Q

What happens to AD when there is a trade surplus/deficit?

A

Surplus - increase AD

Deficit - decrease AD

Economics Theme 2 (6 decks)

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