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Economics A edexel > 2.2 Aggregate Demand > Flashcards

2.2 Aggregate Demand Flashcards

1
Q

Aggregate demand

A

Is the total amount of planned spending/ demand on goods and services at a given price level in an economy in a year

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2
Q

AD Equation

A

CIG+(X-M)

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3
Q

C

A

Consumption (most of AD)

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4
Q

I

A

Investment

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5
Q

G

A

Gov Spending

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6
Q

X-M

A

Net trade (Exports - Imports)

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7
Q

AD curve sloped downwards

A

-real balance effect
-international trade effect
-Interest rate effect

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8
Q

Real balance effect

A

When price level rises PP of cash assets fall which leads to a decrease in demand for real output

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9
Q

International trade affect

A

A rise in price level relative to other countries causes a decrease in international competitiveness causing a decrease in demand for exports and rising demand for imports

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10
Q

Interest rate affect

A

Higher interest rate reduce consumption and investment because more expensive to loan/pay back money reducing PP

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11
Q

Wealth affect

A

As income increases disposable income increases/PP consumer confidence increases stimulating AD

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12
Q

Movement along AD curve

A

-due to changes in price level
-can cause an expansion (right) or contraction (left)

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13
Q

Shift in A.D. curve

A

Shifts when any components of CIG + XM changes

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14
Q

Consumption

A

-Spending of households on goods and services
-main component equals disposable income

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15
Q

disposable income

A

-household income available from employment/private pension/ investments/welfare benefits after taxes have been deducted

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16
Q

Average propensity to consume

A

-Proportion of disposable income spent on consumer G/S -APC= consumption/disposable income x100
-average propensity to save (proportion of disposable income saved)
- APC= saving/disposable income x 100

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17
Q

Interest rate

A

Cost of Credit (borrowing)

18
Q

Interest rate affecting consumption

A

-Credit crunch more difficult to borrow money when rises -if rises cost of borrowing increases = decreases consumption
-money in savings value increase - encourages saving

19
Q

Consumer confidence influencing consumption

A

Future prospects has a has big influence on level of consumer expenditure i.e if think there’s going to be a recession encourages saving

20
Q

Wealth effect influencing consumption

A

-The effect on spending when assets prices change
-increase in house price = consumers feel wealthier encourages more spending
-cost-of-living increases = disposable income decreases

21
Q

Other factors influencing consumption

A

-Level of employment
-welfare benefits
- pension

22
Q

Investment

A

Increase in the capital stock

23
Q

gross investment

A

Total expenditure on new capital goods
gross investment = net investment + depreciation

24
Q

Net investment

A

New additions to capital stock after taking into account the fall in value of capital assets
Net investment = gross investment - depreciation
-More useful than Gross - tells us improvements in prospects for economy

25
Q

influences on 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

26
Q

Rate of economic growth influencing investment

A

-Increase in real GDP firms need more capital to meet increase demand
-increase real GDP = investment to rise and increase investment = real GDP to rise

27
Q

Business expectations and confidence influencing investment

A

If firms expects to sell more in future more likely to invest

28
Q

Keynes an animal spirits influencing investment

A

-Animal spirits describe instincts and emotion that may determine whether or not a firms decides to invest -decisions about whether to invest or not due to a degree of uncertainty or taken as a result of animal spirits

29
Q

Demand for exports influencing investment

A

-Sustained increase in demand for exports is likely to stimulate investment this is also dependent on exchange rate/rules and regulations

30
Q

Interest rates influencing investment

A

-Interest rates rise cost to borrow money = more expensive = investment falls
- however rise may not deter investment if business still think profitable

31
Q

Access to credit influencing investment

A

Banks may be willing to take risks at low interest rates due to aftermath of 2008

32
Q

Influence of government on investment

A

Government policy might mean taxes or subsidies affecting firms to invest or not
-e.g cut in corporation tax = firms more likely to invest
-regulations/laws could also affect investment

33
Q

Government expenditure

A

spending by the public sector on goods and services such as education, health care and defence.

34
Q

Influences on government expenditure

A

-Trade cycle
-fiscal policy

35
Q

Trade cycle influencing government expenditure

A

-Trade cycle = fluctuations in GDP during recession
-government expenditure higher in recession due to e.g welfare benefits

36
Q

fiscal policy influencing government expenditure

A

-Use of government expenditure and taxation to influence level of economic activity
-it can spend more or less than it receives from tax revenues
=E.G Looser fiscal policy = tax cuts

37
Q

net trade X - M

A

-Exports - imports
-shows outflow/inflow of money for foreign goods and services in an economy

38
Q

Influences on the net trade balance

A

-Real income
-changes in the exchange rate
-changes in the state of world economy
-degree of protectionism
-transport costs

39
Q

Real income influencing net trade balance

A

-higher real incomes can lead to increased demand for imports
-trade balance weakens

40
Q

Changes in exchange rate influencing the net trade balance

A

-Exchange rate rises/pound become stronger net exports fall = exports become less internationally competitive = cheaper to import from abroad - trade balance weakens
-however demand for exports and imports could be price inelastic

41
Q

State of world economy influencing net trade balance

A

Trade depends on other countries economies/growth rates E.G Eurozone crisis affected exports in the UK

42
Q

The degree of protectionism influencing net trade balance

A

other countries may have high tariffs and other restrictions making it difficult to export/import

Economics A edexel (5 decks)

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