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Macro-Economics Theme 2 > 2.2 Aggregate Demand > Flashcards

2.2 Aggregate Demand Flashcards

1
Q

Formula of GDP

A

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

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2
Q

What components of Aggregate demand have the biggest effect on economic growth?

A

Investments
Consumption

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3
Q

Components of aggregate demand

A

House Spending (C)
Investments (I)
Government Spending (G)
Exports of goods and services (X)
(Minus) Imports of goods and services (M)

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4
Q

General Price Levels

A

Avg. of current prices across the entire goods and services produced in the economy

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5
Q

Real GDP

A

Value of economic output adjusted for inflation (Price changes)

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6
Q

Reasons why AD Curve slopes down

A

Falling in real incomes
Worse Balance of Trade
Interest rate effect

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7
Q

Tailwinds that move AD out to the right

A

Fall in the exchange rate for the Pound (£) which increases sales of exports
Cuts in taxes
Increase in house prices as People believe they have more wealth
Low interest rates

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8
Q

Headwinds that move AD to the left

A

Reduction in gov spending
Higher interest rates
Lack of investments by firms
Fall in trade with other countries

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9
Q

Consumption

A

The total amount spent on final goods and services by individuals and households for personal use

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10
Q

Examples of personal consumer expenditures

A

Healthcare, travel, clothing and food

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11
Q

Impacts on Consumption: Disposable Income

A

Changes in real income mean that they’ll have less disposable income, so they can afford to spend less on goods and services

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12
Q

Impacts on Consumption: Employment and Job Security

A

When the labour market is improving, confidence and incomes will improve. Increases in employment will lead to higher incomes and demand. Job security encourages people to borrow money to spend as they can pay it back later

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13
Q

Impacts on Consumption: Expectations

A

Economic uncertainty causes less spending. Fears in rising unemployment + expectations of higher taxes will hit consumers sentiment + spending.

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14
Q

What did Keynes suggest should happen if consumer spending falls?

A

Government spending increases triggering multiplier effect.

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15
Q

Multiplier effect

A

Money keeps getting spent by different people as it circulates

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16
Q

Savings

A

The amount of money/ household income that is NOT spent by customers.

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17
Q

Investment

A

Purchase of goods that is not used today, but are used in the future to create wealth

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18
Q

Why does investment happen?

A

To replace worn out old equipment/ capital has depreciated in value.
Due to advancements in technology that will make firms more efficient.
Due to increases in aggregate demand that results in firms needing to increase.
Changes in profits made by businesses which can reinvest.

19
Q

Gross Investment

A

Total amount the economy spends on new capital.

20
Q

Net investment

A

Gross investment adjusted for appreciation of capital. New capital that is replacing old capital.

21
Q

Factors influencing investment: Business expectations and confidence

A

Less confidence so people less willing to spend out of fear of wasting their money

22
Q

Factors influencing investment: Corporate Tax

A

Businesses get taxed more leading to less profits and investments

23
Q

Factors influencing investment: Spare Capacity

A

When a firm is running/ working at a close to full capacity, then they’ll invest to increase capacity.

24
Q

Factors influencing investment: Level of competition

A

If there’s lots of competition for customers and so they’ll be forced to invest to can become more appealing than their competitors

25
Q

Factors influencing investment: Cost of capital

A

If the profit margin increases due to more costs, less retained profit is available to reinvest into the business

26
Q

Fiscal Policy

A

Means of which the government adjusts its investments, tax levels to monitor and influence the nations economy

27
Q

What is crowding out?

A

Gov pushes out private sector activity by doing more, so there’s less work for private sector to do

28
Q

What happens if the government increases spending when there is full employment?

A

Doesn’t work for the government. Them doing more means private sector has less work. The government needs to use the unemployed for it to work.

29
Q

How stupid is Fraser

A

VERY

30
Q

What is the fiscal multiplier?

A

Money put into economy will increase output

31
Q

Automatic Stabilisers: When the economy goes into a boom

A

Taxes increase as people have more income
Gov spending decreases because they get to spend less on benefits
AD grows at a slower rate, benefiting the economy because it reduces inflation

32
Q

Automatic Stabilisers: When the economy goes into a recession

A

Taxes decrease as people have less income
Gov spending increases because they have to pay more benefits
AD falls at a slower rate, benefiting the economy as it reduces unemployment

33
Q

Impact of an increase in trade: Aggregate demand

A

Net trade is one element of AD. if the country runs a trade surplus when AD increases.

34
Q

Impact of an increase in trade: Employment

A

Employment will increase in an export led industry. Jobs will fall in industries that cannot compete with imports.

35
Q

Impact of an increase in trade: Inflation

A

Trade increase leads to a fall in inflation as cheaper imports enter the market.

36
Q

Impact of an increase in trade: Economic Growth

A

Increase in trade should lead to an increase in AD resulting in growth.

37
Q

Changes in Net Trade: Real income

A

If real wages increase then consumer spending will also increase- results in more imports to meet demand, especially if the country has a high propensity to import.

38
Q

Changes in Net Trade: Exchange Rates

A

Changes in the value of currency will impact the relative prices of imports and exports. Rise in exchange rates = Rise in imports and a fall in exports
Fall in exchange rates = Fall in imports and a rise in Exports

39
Q

Changes in Net Trade: Protectionism

A

You dont have trade deals with other countries so there’s tariffs. Other countries encourage free trade with no. restrictions. Signing free trade deals should increase trade.

40
Q

Changes in Net Trade: State of world economy

A

If the rest of the worlds economy and trade is poor, they can’t buy or sell, export or import. If there’s a recession in other countries- demand will fall for our exports

41
Q

Changes in Net Trade: Non-Price factors e.g quantity

A

Countries are more competitive due to: Quality, Marketing, Innovation. Gov policies often try to improve competitiveness

42
Q

Imports increase if…

A

Real income increases
Exchange rate being more valuable
If there’s protectionism

43
Q

Exports increase…

A

State of world economy improves
Quality of product increases, marketed better.

Macro-Economics Theme 2 (5 decks)

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