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macro economics (theme 2) > 2.2 AND 2.3 > Flashcards

2.2 AND 2.3 Flashcards

1
Q

what is meant by aggregate demand

A

the total level of real expenditure on the goods and services produced within a country

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2
Q

what are the components of aggregate demand

A
  • household consumption - C (consumption
  • Gross Fixed Capital Investment Spending by firms - I (investment)
  • government consumption - G (public services)
  • exports of goods and services - X
  • imports of goods and services - M
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3
Q

what is the formula for aggregate demand

A

C + I + G + (X - M)

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4
Q

what is the approximate figure of consumption spent in an economy, investment and government

A

consumption - 65%
investment - 16%
government - 15%
Exports - imports = remainder - 4%

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5
Q

What is meant by real disposable income

A

Income adjusted for inflation - tax + benefits

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6
Q

What is meant by average propensity to consume

A

The proportion of income that is spent

Household consumption
—————————————- x 100
Income

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7
Q

What is meant by marginal propensity to consume

A

The change in consumer spending following a change in income

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8
Q

What is meant by savings ratio

A

% of income that is saved

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9
Q

what is meant by interest rate

A

the cost of borrowing or the reward of saving

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10
Q

what happens when interest rates rise

A

consumption falls, and savings rise

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11
Q

what is meant by consumer confidence

A

measures how optimistic households feel about the future

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12
Q

what does an AD curve show?

A

it shows how much of a good will be consumed at each and every price level

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13
Q

why is an AD curve down sloping?

A
  1. the wealth effect
  2. the interest rate effect
  3. the exchange rate effect
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14
Q

what is meant by the wealth effect

A

When people spend more because the value of their assets increase

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15
Q

what is meant by the interest rate effect

A

as the price level rises, the level of real income falls, and consumers are less likely to save their income. if the levels of savings falls, then the funds available for investment also falls, pushing up the interest rate.

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16
Q

what is meant by the exchange rate effect

A

as the price level rises, UK exports look less competitive compared to foreign goods, so exports falls and imports rise. This means that net exports falls, and spending in the economy also falls.

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17
Q

what would cause a movement along the AD curve?

A

an increase or decrease in the price level

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18
Q

what would cause a shift in the AD curve?

A

a change that affects any of the components of AD

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19
Q

name five factors that increase consumption

A
  • real incomes rising
  • interest rates falling
  • asset prices/wealth
  • job security/confidence
  • personal taxation falling
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20
Q

define investment

A

the purchase of fixed capital such as machinery

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21
Q

what is depreciation of capital?

A

when capital loses value over time due to wear and tear, or it becomes obselete (eg end of products lifespan)

22
Q

distinguish between investment and net investment

A

capital needs to be replaced otherwise the value of capital stock in the economy will start to fall down due to depreciation. net investment is investment over and above the amount of investment needed to replace depreciated capital

23
Q

name 7 factors that increase investment

A 
lower interest rates
high animal spirits
demand for exports rises
business expectation and confidence
access to credit improves
lower corporation taxes and business regulations
high rate of economic growth
24
Q

define government expenditure

A

in the context of AD, it refers to government purchasing of goods and services, for examples paying for hospitals

25
Q

distinguish between government spending and government expenditure

A

government spending in the wider context includes spending on transfer payments where nothing is expected in return such as pensions and welfare payments.

26
Q

define fiscal policy

A

taxation and spending

27
Q

name three fiscal policies

A

income tax falling
VAT rising
corporation tax falling

28
Q

what is meant by a budget deficit

A

when government spending is greater than tax revenue.

29
Q

how does the trade cycle affect government spending

A

during a recession government spending increases as more people claim unemployment benefits etc. also, the government often deliberately runs a deficit in order to stimulate the economy

30
Q

define exports

A

selling UK produced goods and services abroad, and currency flows in to the UK

31
Q

define imports

A

buying goods and services produced abroad, currency flowing out of the UK

32
Q

what is meant by net exports

A

exporting more than importing ( X>M )

33
Q

define exchange rate

A

the rate at which one currency is exchanged for another

34
Q

how does domestic inflation affect net exports

A

prices rise domestically, the UK exports look less competitive compared to similar goods produced by other countries, so net exports would fall

35
Q

how does a global recession affect exports?

A

a global recession such as the one following the global financial crisis in 2008 causes demand for UK exports to fall

36
Q

how does the domestic business cycle affect imports

A

during a uk recession consumption of all goods and services falls including imports

37
Q

what is meant by protectionism and give examples

A

when a country uses barriers to trade to protect domestic industry, eg

  • tariffs - tax on imports
  • quotas - limits placed on the number of goods that can be imported
38
Q

draw a standard Aggregate Supply curve

A

upward sloping
GPL y axis
Real GDP x axis
equiilibrium at GPL1 and Y1

39
Q

why is the AS curve sloping

A

it measures the volume of goods and services produced every year and so measures the ability of the economy to produce them to meet the level of demand in the economy. in the short run, we assume that the price level can change, but factors of production are fixed. the curve is upward sloping because an increase in the price level makes production more profitable and gives firms an incentive to increase output

40
Q

what factors cause a movement along the AS curve and what factors cause a shift in the AS curve

A

changes in the price level causes a movement along

changes in the costs of factors of production shifts the SRAS curve.

41
Q

what is the relationship between short run and long run supply

A

LRAS shows the productive potential of the economy, SRAS holds the long run variables constant, such as productivity and technology.

42
Q

identify and explain three factors that affect SRAS

A

increase in the wage rate - increases cost of production for firms, reduces profitability and so decreases SRAS
increase in VAT - ‘’
commodity prices - ‘’

43
Q

draw a Keynesian AS curve

A

curve goes from horizontal to upward sloping

two AD curves AD1 and AD2 upwards on AS curve

44
Q

draw a classical LRAS curve

A

two vertical LRAS lines, two AD curves. equilibrium at LRAS 1 at P1 and Y1

45
Q

define spare capacity

A

when the factors of production are not working as hard as they could under normal working conditions

46
Q

what part on the Keynesian AS curve represents spare capacity?

A

the flat part - resources arent scarce yet, so output can increase without it being inflationary.

47
Q

what other diagrams show spare capacity

A

PPFs - a point on the PPF, and the economic cycle graph - during a recession

48
Q

why is the Keynesian LRAS curve the shape it is?

A

flat part is the spare capacity
the upward sloping part is because there is an increase in output which causes the price level to rise, as labour becomes scarce and wages rise, and then it goes vertical at the maximum capacity in the economy.

49
Q

why is the classical LRAS curve the shape it is?

A

output can only be increased if the whole LRAS shifts to the right, eg if there was an increase in productivity or tech improved. the LRAS shows the maximum capacity of the economy, with the given state of technology, and also that all factors of production are fully and efficiently used

50
Q

explain 6 factors that would shift the LRAS

A 
increase in the working population
increase in quality of labour
improvement in technology
increase in productivity
net investment increasing capital stock
infrastructure improves

macro economics (theme 2) (5 decks)

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