2.2 aggregate demand

Question 1

aggregate demand formula

Answer 1

C + I + G + (X-M)

Question 2

downward slope of ad curve causes

Answer 2

-higher prices lead to fall in the value of real incomes so goods and services become less affordable
-high inflation means foreign goods seem relatively cheaper so more exports and deficit on the current account
-high inflation means interest rates will be high which will discourage spending

Question 3

consumer spending

Answer 3

-how much consumers spend on goods and services
-largest component of ad and most significant to economic growth
-makes up over 60% of gdp

Question 4

disposable income

Answer 4

the amount of income consumers have after taxes and social security charges have been removed

Question 5

marginal propensity to consume

Answer 5

how much a consumer changes their spending following a change in income

Question 6

marginal propensity to save

Answer 6

proportion of each additional pound of household income that is used for saving

Question 7

influences on consumer spending

Answer 7

-interest rates, low interest rates means more spending
-consumer confidence, high confidence levels means more spending as people are not so worried about the future
-wealth effect, when there is a rise in the price of houses people feel wealthier so they spend more

Question 8

gross investment

Answer 8

the amount a firm invests in business assets that does not account for depreciations

Question 9

net investment

Answer 9

-the actual addition to capital stock of an economy after depreciations have been considered
-net investment = gross investment - depreciation

Question 10

influences on investment

Answer 10

-the rate of economic growth, if growth is high firms make more revenue due to higher rates of consumer spending, more profits to invest
-business expectations and confidence, if they are cleft a high rate of return they will invest more
-interest rates, investment increases as interest rates fall
-government and regulations, rate of corporation tax could affect investment

Question 11

fiscal policy

Answer 11

-governments use fiscal policy to influence the economy and involves changing government spending and taxation
-demand side policy
-spend on public goods and merit goods as well as welfare payments

Question 12

discretionary fiscal policy

Answer 12

implemented through one off changes

Question 13

automatic stabilisers

Answer 13

policies which offset fluctuations in the economy, include transfer payments and taxes and are triggered without government intervention

Question 14

expansionary fiscal policy

Answer 14

involves increasing spending on transfer payments on boosting ad or reducing taxes

Question 15

contractionary fiscal policy

Answer 15

-decreasing expenditure on purchases and transfer payments
-tax may increase
-reduces the size of the government budget deficit

Question 16

net trade

Answer 16

x - m (exports minus imports)
the value of the current account balance of payments
positive indicates a surplus
negative value indicates a deficit

Question 17

main influences on net trade balances

Answer 17

-real income, consumers have higher income they will consume more and import more
-exchange rates, strong pound imports cheap exports dear
-state of the world economy, decline in economic growth in one of its markets means there will be a fall in exports because consumer spending in those economies fall
-degree of protectionism, tariffs, quotas, regulations