Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

IB Economics HL > 2.2 Aggregate demand and aggregate supply > Flashcards

2.2 Aggregate demand and aggregate supply Flashcards

1
Q

Difference between microeconomic demand and macroeconomic demand

A

Microeconomic demand: relationship between ‘price’ and ‘quantity demanded’ - the total quantity of a good that consumers are willing and able to buy

Macroeconomic demand: relationship between ‘price level’ and ‘real output’ - the total spending on goods and services in a given time period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Why is AD a negative slope?

(3)

A
  • Wealth effect: as the price level increases the real value of wealth decreases, therefore, they demand less (negatively proportional)
  • Interest rate effect: as the price level increases the demand for money increases. Interest rates increase and therefore less output is demanded (consumption and investment)
  • International trade effect: as the price level increases compared to other economies, exports become more expensive to foreign consumers whilst imports became relatively cheaper domestically, therefore altering net exports (component of AD)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Equation for AD

A

AD = C + I + G + ( X - M )

“total” demand from all sectors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What does AD assume?

A
  • Ceteris paribus: all else being equal - no other variables have changed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is consumption?

A

Total spending by consumers/household sector on domestic goods and services.

  • Durable goods: used over a period of time (1+ years) e.g. TVs, bikes and cars
  • Non-durable goods: used up over a short period of time (or immediately) e.g. toilet paper, food, petrol
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is investment?

A

Addition of capital stock to the economy, carried out by firms

  • Replacement investment: spending on capital to maintain current capital productivity
  • Induced investment: spending on capital to increase output, due to increased demand in the economy
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is government spending?

A

Spending to achieve government objectives and policies such as education, healthcare, law and order.

Carried by all governments (national, devolved and local)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are net exports?

A

(exports - imports)

Exports: domestically produced G&S bought by foreigners

Imports: G&S bought from foreign producers by domestic consumers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What causes a shift in AD?

What causes movements along AD?

A

A change in one of the determinants ( C / I / G / (X-M) )

A change in the price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What can cause changes in consumption?

(5)

A
  • Changes in consumer confidence
  • Changes in interest rates
  • Changes in wealth
  • Changes in disposable income (income after tax i.e. changes in income tax)
  • Changes in household indebtedness
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What can cause changes in investment?

A
  • Changes in business confidence
  • Changes in interest rates
  • Changes (improvements) in technology
  • Changes in business tax
  • Changes in corporate indebtedness
  • Legal/institutional changes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What can cause changes in government spending?

A
  • Changes in political priorities (depending on ideology and where funding should be allocated)
  • Changes in economic priorities (fiscal policy - depending on business cycle)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What can cause changes in export and import spending?

A
  • Changes in national income abroad (e.g. if foreign consumers get richer they can buy more exports)
  • Changes in exchange rates (relative pricing)
  • Changes in trade policy (protectionism)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the difference between the short run and long run in macroeconomics?

A

Short-run: the period of time when prices of resources (costs of production e.g. wages) are constant or inflexible

Long-run: the period of time when prices of all resources (costs of production) change in accordance with price level or are flexible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Why are wages “sticky” and what does this mean?

A

“sticky”: they are rigid and so not change by much over short periods of time

Due to:

  • Labour contracts fix wages for certain periods of time (can even span for years)
  • minimum wage legislation fixes the minimum cost of labour
  • workers and unions resist wage cuts
  • wage cuts can negatively affect worker morale, so are avoided
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is aggregate supply?

A

The total quantity of goods and services produced in an economy (real GDP) over a time period at different price levels

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is short-run aggregate supply (SRAS)?

A

The relationship between the price level and the quantity of output (real GDP) produced by firms when resource prices do not change

18
Q

Why is SRAS a positive slope?

A

Profitability.

As price levels increase, output prices also increase (whilst output costs, costs of production, stay constant), therefore a firm can gain more by supplying a higher quantity.

19
Q

What causes a shift in SRAS?

What causes movements along SRAS?

A

Changes in costs of production (non-price)

Changes in price supplied by producer

20
Q

Examples of causes of SRAS shifts

A
  • Changes in wages (e.g. minimum wage or bargaining power)
  • Changes in non-labour resource prices (e.g. equipment)
  • Changes in business taxes
  • Changes in subsidies
  • Supply shocks (e.g. war or weather)
21
Q

What is long-run aggregate supply (LRAS)?

A

The long-run relationship between price level and aggregate output

22
Q

What is a new classical/monetarist view of LRAS?

A

LRAS is a vertical (perfectly elastic) supply curve at potential output

23
Q

Why is LRAS vertical in the new classical/monetarist view?

A

Since all costs of production (including wages) are flexible, the costs of production remain constant for any price level.

24
Q

Why is LRAS at potential output?

A

The assumption is that the business cycle causes short-run shifts and that over time it corrects itself to the potential output

25
Q

What is the Keynesian view of LRAS?

A

It has three sections:

  • Section 1 where the AS is perfectly elastic (horizontal)
  • Section 2 where the AS follows the law of supply and increases in GDP correspond to increases in the price level
  • Section 3 where the AS is perfectly inelastic (vertical)
26
Q

What does the first section show about Keynesian AS?

A

There is a lot of unemployment of resources and spare capacity.

Increases in output would not cause an increase in the price level, you would be supplying the need rather than reducing scarcity.

27
Q

What does the second section show about Keynesian AS?

A

As the employment of resources reaches potential, there is no longer any spare capacity.

Costs of production start to increase due to competition on supply and scarcity,

28
Q

What does the third section show about Keynesian AS?

A

Real GDP reaches a point where it cannot increase anymore, regardless of the price level.

Any efforts to increase GDP will cause the price level to rise sharply, whilst having no effect on real GDP

29
Q

What does the Keynesian model for AS show?

(2)

A
  • Recessuibart gaps can persist over a long time
  • Increases in AD need not cause increases in the price level
30
Q

How is economic growth presented in LRAS?

(and graphically)

A

LRAS increases over time show economic growth.

In both models, AS shifts rightwards (Keynesian AS is lengthened further right)

31
Q

Factors that cause increases in LRAS over time

(6)

A
  • Increases in the quantity of factors of production
  • Increases in the quality of factors of production
  • Improvements in technology
  • Increased efficiency
  • Institutional changes
  • Reductions in the natural rate of unemployment
32
Q

What is the Keynesian multiplier?

A

Increases in any components of AD (C/I/G/(X-M)) will most likely have a greater increase in GDP than that of the initial increases in the components.

33
Q

Equation for the Keynesian multiplier (real GDP)

A

multiplier = (change in real GDP/initial change in expenditure)

34
Q

What is the range for the Keynesian multiplier?

A

multiplier > 1

35
Q

What is the marginal propensity to consume?

A

MPC is the additional income that households spend on the consumption of domestically produced goods and services

36
Q

What is MPS, MPT, MPM?

A

MPS = Marginal propensity to save

MPT = Marginal propensity to tax

MPM = Marginal propensity to import

(all the leakages)

37
Q

What must all the marginal propensities sum to?

A

1

MPC+MPS+MPT+MPM = 1

38
Q

Equation for the Keynesian multiplier (propensity)

A

Multiplier = 1/(1-MPC)

or

Multiplier = 1/(MPS+MPT+MPM)

39
Q

How do you show the Keynesian multiplier effect graphically?

A

Shifts in AD right, then further right again

40
Q
A

IB Economics HL (15 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions