2.2 Aggregate Demand

Question 1

Formula of GDP

Answer 1

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

Question 2

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

Answer 2

Investments
Consumption

Question 3

Components of aggregate demand

Answer 3

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

Question 4

General Price Levels

Answer 4

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

Question 5

Real GDP

Answer 5

Value of economic output adjusted for inflation (Price changes)

Question 6

Reasons why AD Curve slopes down

Answer 6

Falling in real incomes
Worse Balance of Trade
Interest rate effect

Question 7

Tailwinds that move AD out to the right

Answer 7

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

Question 8

Headwinds that move AD to the left

Answer 8

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

Question 9

Consumption

Answer 9

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

Question 10

Examples of personal consumer expenditures

Answer 10

Healthcare, travel, clothing and food

Question 11

Impacts on Consumption: Disposable Income

Answer 11

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

Question 12

Impacts on Consumption: Employment and Job Security

Answer 12

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

Question 13

Impacts on Consumption: Expectations

Answer 13

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

Question 14

What did Keynes suggest should happen if consumer spending falls?

Answer 14

Government spending increases triggering multiplier effect.

Question 15

Multiplier effect

Answer 15

Money keeps getting spent by different people as it circulates

Question 16

Savings

Answer 16

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

Question 17

Investment

Answer 17

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

Question 18

Why does investment happen?

Answer 18

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.

Question 19

Gross Investment

Answer 19

Total amount the economy spends on new capital.

Question 20

Net investment

Answer 20

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

Question 21

Factors influencing investment: Business expectations and confidence

Answer 21

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

Question 22

Factors influencing investment: Corporate Tax

Answer 22

Businesses get taxed more leading to less profits and investments

Question 23

Factors influencing investment: Spare Capacity

Answer 23

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

Question 24

Factors influencing investment: Level of competition

Answer 24

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

Question 25

Factors influencing investment: Cost of capital

Answer 25

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

Question 26

Fiscal Policy

Answer 26

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

Question 27

What is crowding out?

Answer 27

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

Question 28

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

Answer 28

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.

Question 29

How stupid is Fraser

Answer 29

VERY

Question 30

What is the fiscal multiplier?

Answer 30

Money put into economy will increase output

Question 31

Automatic Stabilisers: When the economy goes into a boom

Answer 31

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

Question 32

Automatic Stabilisers: When the economy goes into a recession

Answer 32

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

Question 33

Impact of an increase in trade: Aggregate demand

Answer 33

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

Question 34

Impact of an increase in trade: Employment

Answer 34

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

Question 35

Impact of an increase in trade: Inflation

Answer 35

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

Question 36

Impact of an increase in trade: Economic Growth

Answer 36

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

Question 37

Changes in Net Trade: Real income

Answer 37

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.

Question 38

Changes in Net Trade: Exchange Rates

Answer 38

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

Question 39

Changes in Net Trade: Protectionism

Answer 39

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.

Question 40

Changes in Net Trade: State of world economy

Answer 40

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

Question 41

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

Answer 41

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

Question 42

Imports increase if...

Answer 42

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

Question 43

Exports increase...

Answer 43

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