2.2 topic sheet questions

Question 1

Define agregate demand?

Answer 1

Agregate demand (AD) is the total expenditure in an economy.

Question 2

Identify 4 components of AD.

Answer 2

Consumption+Investment+government spending+(exports-imports).

Question 3

How significant are the components of AD?

Answer 3

Consumption is the most significant element as 65% of spending is from consumption.
Investment is 15%,
Gov expenditure is 15%.
And exports- imports is the remainder.

Question 4

Draw an AD curve.

How would you draw one.

Answer 4

See notes.
GDP on x axis and Price level on Y axis.
Downward sloping curve.
GDP=Y
Price level= P
Show lines of equilibrium.

Question 5

Why is an AD curve downward sloping?

Answer 5

The wealth effect-

Question 6

Why is an AD curve downward sloping?

Answer 6

The wealth effect- As the price level rises the level of real income in the economy falls so less can be consumed.

The interest rate effect- As the price level rises, the level of real income falls, and consumers are less likely to save their income. If the level of savings falls, then funds for investment fall. Which pushes up interest rate.

The exchange rate effect- as the price level rises UK exports look less competitive compared to foreign goods. So exports decrease and imports rise. Making net exports a negative component of AD.

Question 7

What would cause a shift in an AD curve?

Answer 7

A change that affects any of the components of aggregate demand. Or a change to the conditions of demand in the economy.

Question 8

What would cause a shift in an AD curve?

Answer 8

A change that affects any of the components of aggregate demand. Or a change to the conditions of demand in the economy.

Question 9

Name 5 factors that would impact consumption?

How to remember them?

Answer 9

RAJIP

Real incomes rising faster than inflation.

Asset prices or wealth.

Job security confidence.

Interest rates falling.

Personal taxation falling.

Question 10

How does real income rising impact consumption?

Answer 10

If real income rises, then some of that extra income will be spent.
—-
The amount depends on marginal propensity to consume.
MPC= (the proportion of additional income spent)

Question 11

How do asset prices or wealth impact consumption?

Answer 11

If assets such as stocks and shares increase in value. This will make the consumers feel more valuable so they will consume more.

(Wealth effect)

Question 12

How does job security/ confidence impact consumption?

Answer 12

If job security is high and confidence in the economy is high consumption will be higher.

Question 13

How do Interest rates falling

impact consumption?

Answer 13

1-If interest falls the reward for saving decreases so
more people will spend.

2- Repayment on loans will be lower so people may take out loans and spend more.

3- Purchasing goods on credit will be lower (so increased spending for consumer goods.

Question 14

How does personal taxation falling impact consumption?

Answer 14

If income tax or national insurance falls then real disposable income will rise. Some of this income is likely to be spent.

Disposable income= income - tax and + benefits

Question 15

Define investment

Answer 15

is the gross spending on fixed capital

Question 16

Define exports?

Answer 16

Selling UK produced goods and services abroad currency flows into the UK.

Question 17

Define imports?

Answer 17

UK buying goods from other countries, money flowing out of the UK.

Question 18

What is meant by net-exports?

Answer 18

the difference between exports and imports. (x-m).

Question 19

Define exchange rate?

Answer 19

The rate at which one currency can be exchanged for another.

Question 20

Explain the effect at which currency can be exchanged for another?

Answer 20

A strengthening £ should increase imports and decrease exports.
As imports will be cheaper for UK.
Exports will be more expensive for other countries.

Question 21

What is meant by the Marshall-Lerner condition/

Answer 21

The Marshall-Lerner condition states that a current account deficit will improve following a depreciation, but only if the sum of the PED of imports and exports >q

Question 22

How does domestic inflation affect net exports?

Answer 22

Inflation makes UK exports less competitive as they are more expensive.
It makes imports cheaper for the UK so they will be cheaper.
so X

Question 23

How does domestic inflation impact net exports?

Answer 23

If there is domestic inflation goods and services will be more expensive so net exports would fall.

Question 24

How does a global recession impact net exports?

Answer 24

Causes demand for UK Exports to fall so x

Question 25

How does the domestic cycle impact imports?

Answer 25

During a UK recession consumption of all goods and services falls including imports.

Question 26

What is meant by protectionism and give examples?

Answer 26

Protectionism is when a country uses barriers to protect domestic industry.
Tarrifs: tax on imports.
Quotas 
Non tarrif barriers.
Red tape

Question 27

What is the J curve effect?

Answer 27

When a currency weakens and consumers continue to buy imports. This is because they have a low PED for imports in the immediate term. This could be due to the fact they are locked in contracts with suppliers.

Question 28

Name 5 factors that would increase consumption?

How does each factor impact consumption.

Answer 28

Consumer confidence.
Interest rates.
Asset prices/wealth effect.
Personal taxation falling.
Job security .

Question 29

Define investment?

Answer 29

Is the purchase of fixed capital like machinery.

Question 30

What is depreciation of capital?

Answer 30

When capital loses value over time which could be due to wear and tear.

Question 31

What 7 factors would increase investment?

Explain how each factor impacts investment?

Answer 31

Lower interest rates,
High animal spirits.
Business confidence,
Demand for exports rises,
Access to credit improves,
Lower corporation tax and business regulations,
A high rate of economics growth.

Question 32

Define government expenditure?

Answer 32

Government purchasing of goods and services, such as paying for doctors or buying drugs in a hospital.

Question 33

Distinguish between government spending and government expenditure?

Answer 33

Government spending also includes spending on transfer payments where nothing is expected in return.
Capital spending in government is included in
investment.

Question 34

Define fiscal policy?

Answer 34

Government taxation and spending.

Question 35

What is meant by government spending?

Answer 35

When government spending is greater than tax revenue.

Question 36

How does the trade cycle impact government spending?

Answer 36

When the economy is in a boom the government receives more in taxes and has to spend less in benefits.

When the economy in a recession unemployment is higher so more has to be spent on JSA and less receipts would be made from taxes.