2.2 Aggregate Demand Flashcards

1
Q

what is the definition of AD

A

the total demand for all G/S in an economy at any given average price level

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2
Q

equation for AD

A

C + I + G + (X-M)

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3
Q

what does it mean if AD increases

A

economic growth has occured

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4
Q

what is the definition of consumption

A

the total spending on G/S by consumers in an economy

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5
Q

what is the definition of investment

A

the total spending on capital goods by firms

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6
Q

what is the definition of government spending

A

the total spending by the government in the economy

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7
Q

what is the definition of net exports

A

the difference between the revenue gained from exports and the expenditure on imports

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8
Q

why is the AD curve downward sloping

A

the interest rate effect
the wealth effect
the exchange rate effect

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9
Q

what is the interest rate effect

A

higher interest rates reduce investment and are an incentive for households to save instead

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10
Q

what is the wealth effect

A

as a person’s assests increase in price, they consume more as they feel wealthier

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11
Q

what is the exchange rate effect

A

SPICED (strong pound imports cheaper exports dearer) and WPIDEC (weak pound imports dearer exports cheaper)

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12
Q

what happens to the AD curve when there is a change in average price level

A

there is a movement along the AD curve

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13
Q

when does a shift in the AD curve occur

A

when there is a change in any of the determinants of AD

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14
Q

what is disposable income (RDY)

A

money that households have left over from their wages after they have paid direct taxes and received any subsidies/benefits

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15
Q

how do interest rates affect consumption

A

higher interest rates give a greater incentive to save and will increase mortgage payments, so there is less consumption

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16
Q

how does consumer confidence affect consumption

A

a stronger economy leads to higher consumer confidence. consumers are more confident of receiving a regular salary, so consumption increases and saving decreases

17
Q

what is depreciation

A

the decrease in monetary value of a capital good (asset) over time

18
Q

why would firms choose to invest

A

increased growth in the economy signals that higher output will result in higher profit
decreased interest rates will encourage firms to take out more loans for investment
increased demand for exports will encourage firms to invest to meet global demand
government regulation and intervention

19
Q

what are the influences on investment

A

business expectations and confidence
Keynesian animal questions
access to credit

20
Q

what are the influences of government spending

A

rate of unemployment
tax revenue

21
Q

what are the influences on the net trade balance

A

UK real income changes
real income abroad changes
UK £ appreciates/depreciates
world economy booms/slows
protectionism

22
Q

what causes movement along the AD curve

A

changes in consumption
changes in investment
changes in net exports
which change price level