2.2 Aggregate Demand Flashcards by Rayaan-Ali Merali

What is aggregate demand?

Similar to GDP, it is the total planned real expenditure on a country’s goods and services produced within an economy in each time period
AD= C+I+G+ (X-M)

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Describe an aggregate demand curve

On the X-axis is Real GDP (Y)
On the Y-axis is General Price Level (GPL)
Line sloping downwards

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Why does the AD curve take this shape?

As prices of goods and services go up, less money can be used to consume, invest and export, thus reducing real GDP

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What are other explanations for the downward sloping AD curve?

Real income effect
Balance of trade effect/wealth effect
Interest rate effect

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What is the real income effect?

As price levels fall, real value (value for money) rises, allowing consumers to buy more

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What is the balance of trade effect?

A fall in relative price level of country X could increase the price of foreign produced goods and services, leading to an increase in exports and decrease in imports

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What is the interest rate effect?

Price inflation is low, leading to central bank reducing interest rates. This provides less of an incentive to save, so more people consume and prices increase
Depreciating exchange rates also occur, resulting in an improvement in exports

reduces value in exchange rate

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What are the main causes of shifts in aggregate demand?

Change in real incomes and employment
Changes in Government spending taxation and borrowing
Changes in monetary policy, interest rates & credit supply
Changes in external value of a country’s exchange rate
Changes in rate of economic growth of trading partner nations
Fluctuations in consumer & business confidence

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What is the difference between movement and shifting in an aggregate demand curve?

what do shifts cause?

Movement refers to when there is changes in General Price Level
Shifting is when there are changes in other factors

shifts cause a multiplier effect

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What were the 2 advantages of a benefit cap being introduced?

Reduce Government spending on benefits
Encourage people to work

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explain the contraction and expansion of AD

contraction of ad is rise in price level

expansion of ad is fall in price level

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what are the key factors that influence consumer spending?

-changes in real disposable income
-level of and changes in employment and job security
-consumer credit(affects willingness to borrow)
-consumer confidence
-the cost of servicing a mortgage(interest rates)
-change in price of assets (property shares) affects wealth
-expectation of future price change

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what contributes the most to consumption?

housing

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what is consumer confidence?

consumer confidence are surveys or measure changes in consumer attitude, including expectations of the economic situation and households own financial positions.

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what factors does consumer confidence depend on?

base interest rate- set by bank of England used by banks
Disposable income-income after tax and addition of welfare
FTSE 100-track share prices of the 100 largest companies listed on the London stock exchange.
Savings ratio-ratio of personal saving to household disposable income.

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what is MPC and how to calculate it?

what should government do with those of high mpc?

Marginal propensity to consume is the change in consumer spending arising from a change in disposable income.

change in consumption/change in income

goverment should target tax reduction on low income families with high mpc

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what is household savings?

saving is disposable income that is not spent.

Yd= c+s therefore s=Yd-c

What is MPS and how to calculate it?

Marginal propensity to save is the change in spending because of a change in household disposable income

change in savings/change in income

what is household saving ratio and how to calculate?

it measures amount of money that households have available to save.its measured as a percentage of total disposable income

savings/disposable income

what are they key factors that influence household savings?

real interest rate-positive rate incentives saving.

Price expectation-if consumers expect price to fall ie deflation they may save more.

consumer confidence

trust in savings institutions-deposit guarntees

taxation of savings-saving schemes like isa are tax free
job security/unemployed

availability of credit

what is household debt?

It’s when households borrow money using credit cards.

this is counted as dis-saving as their borrowing allows them to spend more than their current disposable income.

what is investment?

its when firms spend money on capital goods to increase production.

what factors influence the level of investment?

-Interest rates (firms finance investment by borrowing)
-Business confidence (determined by future expected profit and demand)
-corporation tax(retained profit after corporation tax)
-spare capacity(if greater MPI will decrease)
-level of competition(if competitors invest in capital r&d innovation)
-the price of capital

why does business confidence affect the level of investment?

Business confidence is determined by future expected profit and demand. If both are high I will increase.

what is corporation tax? and what is retained profit?

corporation tax is for firms and taxes its retained profit. retained profit is profit after corporation tax.

how does the level of competition affect investment?

if competitors invest in capital r&d and innovate products with the latest technology then firms would need to invest in capital to keep up with the advancements.

what is the accelerator effect?

its when there is an increase in the rate of real GDP in the economy which then encourages investment.

what are the types of goverment spending?

-current spending(it is the spending for maintenance of public services and payment of public sector wages. -capital spending(its the spending on infrastructure) -welfare spending (the spending on benefits and pensions. makes up most of gov spending. -Debt interest payments(withdrawal)

what is a budget deficit?

its when government spending is greater than the taxation revenue in a fiscal year (amount of borrowing in one year)

what is a budget surplus?

its when taxation revenue is greater than government spending in a fiscal year.

what is national debt? what is the link to the national debt and budget deficit?

national debt is the total stock of debt. its the accumulation of budget deficit.

what are the main influences on net trade (x-m)?

-real disposable income earned abroad -real disposable income earned at home -strong or weak exchange rates(spiced widec) -relative inflation levels at home)

how does real disposable income earned abroad and at home influence net trade?

if people living abroad earn more than their marginal propensity to import goods increases. unless recession happens it will decrease. If there is a boom in the UK, the marginal propensity to import will increase. Import expenditures will increase, which causes the economy to go left. If a recession happens, imports will decrease.

how does relative inflation levels at home influence net trade? how does it impact imports?

high relative inflation in the UK reduces export competitiveness and reduces export revenue AD will shift left. if relative inflation in the UK is lower export demand will increase from other countries. if relative inflation in UK is higher imports become competitive, and import expenditure will increase. VISE VERSA

what is gross investment?

is the total amount of spending on capital goods This spending includes replacing old capital goods and purchasing new capital goods

what is net investment?

net investment = Gross investment minus capital consumption(depreciation) some investment is needed each year to replace worn out machinery.

what is fiscal policy?

It is what the government lays out to decide where money is spent and how much

what is expansionary fiscal policy and also contractionary?

expansionary fiscal policy is when the government increases spending or reduces taxes to stimulate economic activity though this causes a budget deficit. Contractionary is when the government reduces spending or increases taxes to control inflation and rein in the overheating economy. cause budget surplus but ad shifts left.

how does trade cycle impact gov spending?

gov need to make decisions over expenditure to regulate AD and the trade cycle. In recession, G might increase to increase demand for jobs and support those through benefits. in a boom, G may decrease to reduce spending and inflation

what is gov budget?|

it's taxation revenue and government spending

Define the term injection

Injection compromises of investment and exports, et cetera