2.2 (Aggregate demand) Flashcards
what is the formula for AD?
AD= C+I+G+(X-M)
.C= consumption
.I= business Investment
.G= government spending
.X= exports
.M= imports
define aggregate demand
The total demand of goods and services in an economy, in a given period of time. Where factors of production cannot change.
define wealth effect
The wealth effect is the tendency for people to spend more when their perceived wealth, such as the value of their assets (e.g., homes or stocks), increases, and to spend less when it decreases.
define interest rates
In economics, interest rates are the cost of borrowing money or the return earned on savings, expressed as a percentage of the principal amount over a specified period. They are determined by factors like central bank policies, market demand for loans, and inflation expectations
what is the difference between gross and net investment?
gross investment= The total amount spent on new capital assets (e.g., machinery, equipment, buildings) during a specific period.
net investment= refers to the total spending on new capital assets (such as machinery, equipment, or buildings) minus the depreciation of existing assets.
define animal spirits
.animal spirits refer to the emotions, instincts, and confidence that drive human behaviour in financial and economic decision-making.
high animal spirits= increased consumption and business investment
low animal spirits= increased saving and decreased business investment
. term was popularised by Jhon Maynard Keynes
what are the influences on investment
.the rate of economic growth
.business expectations and confidence
.Keynes and ‘animal spirits’
.demand for exports
.interest rates
.access to credit
.the influence of government and regulations
define fiscal policy
A policy that uses government spending and taxation to affect the economy as a whole.
state and briefly explain the stages of the trade cycle
1.Boom (Peak):
-Rapid economic growth, high consumer and business confidence, low unemployment, and rising inflation.
2.Downturn (Contraction):
-Economic growth slows, demand weakens, and businesses cut back on investment and unemployment may begin to rise.
3.Recession (Trough):
-A period of negative economic growth (declining GDP for two consecutive quarters).
-High unemployment, reduced consumer spending, and low inflation or deflation.
4.Recovery (Expansion):
-Economic activity begins to grow again as confidence returns. Unemployment falls, demand increases, and businesses invest more.
define real incomes
Real incomes refer to the purchasing power of an individual’s or household’s income, adjusted for inflation. They show how much goods and services can be bought with the income earned, accounting for changes in price levels.
. A rise in real incomes can lead to a rise in subjective happiness.
what are some non-price factors that affect net trade balance?
. Quality of Goods and Services:
. free-trade agreements
. availability of natural resources
define exchange rates
shows the value of one currency in terms of another currency.
define the degree of protectionism
The degree of protectionism refers to the extent to which a country restricts international trade through policies like tariffs, quotas, and subsidies to protect domestic industries from foreign competition. A higher degree means more trade barriers, while a lower degree indicates fewer restrictions and a more open trade environment.
