2.2 Aggregate Demand Flashcards by Isabelle Kazali

Why does the aggregate demand curve slope downwards?

Real balance effect – All changes lead to an opposite change.

Interest rates – High/low

Trade effect – Low prices = higher demand

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What causes a shift in the aggregate demand curve?

Changes in the components of aggregate demand is going to cause a shift in the AD curve.

Shift to the right means an increase in the levels of aggregate demand.

Shifts to left mean a decrease in the levels of aggregate demand.

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What are the components of aggregate demand.

Consumption spending
Investment spending
Gov spending
Net exports (Exports-Imports)

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What causes a movement in the aggregate demand curve?

A movement is when the price level of an economy changes without changes in any component of aggregate demand.

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What factors may determine the level of consumption within an economy?

Disposable incomes
Wealth
Interest rates
Ease of borrowing
Levels of taxation
Confidence levels

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What is the definition of income?

Income is a flow concept; it is the amount of money that has been received over some time.

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What is the definition of wealth?

Wealth is a stock concept; it is the total of someone’s assets, including shares, cash and property.

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What is disposable income?

The amount of money a person has left after taxes have been paid.

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What is discretionary income?

The amount of money a household/person has to spend after they have paid all their bills and taxes.

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What is the wealth effect?

When a person’s wealth increases because of many reasons such as an increase in shares or house prices. Meaning they are now prepared to spend more than save.

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What is a boom?

When GDP has increased for 6 months or two consecutive quarters.

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What is a recession?

When GDP has decreased for 6 month or two consecutive quarters.

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What is the main source of household borrowing?

The main source of household borrowing is a mortgage.

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What is a variable rate mortgage?

A mortgage with no fixed interest rate.
Increasing interest rates means households with a variable rate mortgage will have increased costs of bills meaning a decrease in discretionary income.

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What is consumer confidence?

Consumer confidence – a measurement of how optimistic/pessimistic consumers feel about the state of the economy.
If house prices are increasing people will be more confident to buy a house because they think that they’ll get their money back.

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What is the definition for investment?

Investment – the expenditure that is undertaken by firms on capital goods to increase output.

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What is gross investment?

Gross investment refers to the total expenditure made on acquiring new capital goods or increasing the stock of existing capital goods within an economy during a specific period

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What is net investment?

Net investment is the total amount of money that a company spends on capital assets, minus the cost of the depreciation of those assets.

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What are factors that could impact the level of investment from firms?

Interest rates
Profits of the business
Levels of confidence
Taxation
Government policy
Exchange rates
Access to credit
New technology

What is business confidence?

‘Animal spirits’ – the forces that make markets more in large booms and busts, as people buy and sell impulsively rather then calmly, using pure rational behaviour.
Suggests humans have a ‘herd instinct’
Humans buy when we see prices rising and sell when we see prices falling.

What is the accelerator effect?

When firms are confident with the state of the economy, so they invest hoping consumers continue buying goods and services.
An economy is entering a period of economy growth…
An increase in consumer demand for goods and services…
Firms get close to full capacity…
Firms invest to help meet rising demand…
Consumption rises again

What does the government spend its money on?

Education
Healthcare
Military
Infrastructure
Welfare payments
Transport links

What percentage of aggregate demand does government spending account for?

It only accounts for around 25% of aggregate demand due to welfare payments (benefits).

What percentage of the total economies spending does government spending account for?

Gov spending is roughly 40% of the total economies spending – totalling around £590 billion each year.

What are welfare payments classed as in terms of government spending?

Welfare payments – classed as a movement of spending power absorbed in the form of consumption.

What is the business cycle?

Business cycles are a type of fluctuation found in the aggregate economic activity of a nation—a cycle that consists of expansions occurring at about the same time in many economic activities, followed by similarly general contractions. This sequence of changes is recurrent but not periodic.

How does government spending change during the 4 stages of the business cycle?

Boom – government spending will increase on education, healthcare etc. Slump/trough – government spending will increase on benefits. Recession – gov will start to increase spending on benefits and decrease spending on education or roads etc. Recovery – spending begins to increase on education, infrastructure etc and decrease on benefits.

What are the 4 stages of the business cycle?

Boom/peak Slump/trough Recession/contraction Recovery/expansion

What is the fiscal policy?

a policy governments can use to try and manipulate aggregate demand.

What are the two parts the fiscal policy can be broken into?

Government spending Taxation

How can you calculate whether an economy is in a surplus of deficit

Tax revenues – Government spending If positive the economy is in a surplus. If negative the economy is in a deficit.

What is a loose fiscal policy?

Is when gov spending is greater than taxation it receives. (deficit – can lead to debts and more borrowing meaning tax rates may increase)

What is a tight fiscal policy?

When gov spending is less than the tax it receives. (surplus)

What is the net trade balance?

Net trade balance is the difference in value between a country’s exports of goods and services and its imports.

What are net exports?

Net exports are a measure of a nations total trade.

Does the Uk's current account have a deficit or a surplus?

Overall, the UK has a trading deficit, which means the UK runs a deficit on the current account.

What are some impacts on the value of net trade?

Changes in real income. Changes in exchange rate. The degree of protectionism. Relative inflation.

What is marginal propensity to import (MPM)?

The change in imports induced by a change in disposable income.

What are changes in real income in terms of net trade?

If Uk incomes increase, demand for imported goods will also increase. Uk consumers will demand more cars etc most of which will be imported. This will drastically increase the net trade deficit.

What number means a high marginal propensity to import (MPM)?

1 = high MPM.

What are changes in the global economy in terms of net trade?

What is happening within other countries will depend on whether the demand for imports/exports will rise/fall. If growth is high in the UK they may demand more goods from other countries. If there is a recession in the USA but the Uk are experiencing a boom, the USA will buy less imports an try to export more to the Uk. This would harm the trade balance in the Uk.

What is degree of protectionism in terms of net trade?

These are methods to protect domestic firms. It means that imports will decrease, and exports will increase, resulting in a trade surplus. This can cause an increase in AD however may cause inflation.

What are some methods of protectionism?

Methods of protectionism: Tariffs Subsidies Quotas

What are quotas?

A limit on the amount of exports and imports into the economy.

What do Non-Price factors mean in terms of net trade?

These are factors that make the goods/services unique or help to gain an advantage.

What are some non-price factors in terms of net trade?

Advertising Accessibility (location) Quality Aftersales service These all lead to an economy being internationally competitive.