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Macro economics > 2.2.1-5 Aggregate demand - net trade > Flashcards

2.2.1-5 Aggregate demand - net trade Flashcards

1
Q

what is aggregate demand?

A

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

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2
Q

whats the formula for aggregate demand?

A

AD = C + I + G + (X-M)
(consumption is biggest component, 63% of UK economy)

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3
Q

what are the labels for an aggregate demand curve?

A

x-axis = real GDP
y-axis = general price level

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4
Q

whats general price level?

A

the average of the current prices across the entire economy

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5
Q

whats real GDP?

A

the value for the economic output adjusted for price changes

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6
Q

why does the AD curve slope downwards?

A
  • real income effect, as price levels fall the real value of income rises and consumer can buy more
  • balance on trade effects fall in relative price of one country could make foreign goods more expensive causing a rise in exports and fall in imports
  • interest rate effect,if price inflation is low there will be a reduction in interest rates, less incentive to save
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7
Q

what are movements on the AD curve caused by?

A

changes in price levels

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8
Q

what are shifts on the AD curve caused by?

A

non-price factors

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9
Q

what is consumption?

A

spending on consumer goods and services (main sources are wages, savings, pensions and benefits)
- consumption is the biggest component of the UK aggregate economy

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10
Q

whats marginal propensity to consume?

A

the change in spending following a change in income (proportion of additional income that is spent)

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11
Q

what factors affect consumer spending?

A
  • real disposable income
  • employment and job security (rising confidence = spend more )
  • household wealth (value of assets incl house prices)
  • expectations and sentiment
  • interest rates (create incentive to save)
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12
Q

why’s consumer confidence important?

A

encourages spending instead of saving

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13
Q

what are household savings and ratio?

A

people choosing to postpone consumption and it estimates the amount of money households have available to save measured as a % of their total disposable income

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14
Q

whats the importance of savings?

A
  • business survival (can cushion during recession)
  • funding investments
  • buffer of financial resources for consumers
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15
Q

whats are investments?

A

the purchase of goods not used today but used in the future to create wealth

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16
Q

what are gross investments?

A

total investments on new capital inputs

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17
Q

what are net investments?

A

gross investments adjusted for depreciation of capital

18
Q

what factors affect private sector investment?

A
  • actual and expected demand
  • cost of capital i.e. rate of interest on loan
  • avaliability of borrowing
  • business taxes
  • the pace of change of technology in a give industry
  • govt. intervering
19
Q

what does Keynes means when saying animal spirits?

A

a notion referring to a mix of confidence, trust,mood and expectations (fluctuates quickly as thinking does)

20
Q

what are the advantages of investment?

A
  • injection into the circular flow of income
  • new capital can aid productivity
  • creates extra demand in investment goods
  • strong multiplier effect on GDP level
  • support countries competitiveness and therefore improves trade
21
Q

budget deficit?

A

govt. spending exceeds tax revenue earned

22
Q

budget surplus?

A

govt. spending less than tax revenue earned

23
Q

why when GDP rises does the govt. automatically receive more tax without rising taxation?

A

because of income, corporation tax and VAT so as people have more taxable money which they then also spend

24
Q

whats govt. spending?

A

spending by the public sector on goods and services such as education, health care and defence
- key component of aggregate demand, has economic impact regionally and can help achieve greater equity in society

25
Q

whats capital spending?

A

expenditure that results in the acquisition or construction of a fixed asset (land, building, vehicle, equipment) or enhancement of an existing fixed asset

26
Q

what is net trade?

A

the difference in value between a country’s exports of goods and services and its imports

27
Q

what are the factors with trade that affect aggregate demand?

A
  • if domestic incomes high the demand for imports is likely to rise
  • relative prices of exports in world markets
  • the exchange rate of exports in world markets, a stronger currency makes exports more expensive and imports cheaper
  • non-price demand factors eg design and imports cheaper
  • strength in AD in key export markets (state of world economy)
  • the level of protectionism eg use of tariffs and quotas
28
Q

how does net trade affect AD?

A
  • a trade surplus means that the value of exports is greater than the value of imports - so AD will increase
  • a trade deficit means that the value of imports is greater than the value of exports - so AD will fall
29
Q

whats the accelerator effect?

A

when investment levels are related to change of GDP,an increase in economic growth = corresponding larger level of investment due to more confidence and spending so firms invest
but investment is vary variable and change change quickly

30
Q

what are the main influences on government expenditure?

A
  • trade cycle, when GDP is rising the govt will receives more tax so can spend more
  • fiscal policy
31
Q

whats the fiscal policy?

A
  • government spending
  • taxation
  • borrowing
    ➡️ to affect the level and growth of aggregate demand, output and jobs
32
Q

whats current spending?

A

Involves recurring spending on providing public services

33
Q

whats capital spending?

A

Projects to provide new public infrastructure

34
Q

whats transfer spending?

A

redistribution of money to those in need eg benefits

35
Q

whats the significance of government spending?

A
  • a key component of aggregate demand
  • has a regional economic impact
  • important in providing public and merit goods
  • can help achieve greater equity in society
36
Q

what are the main factors that affect net trade?

A
  • real income
  • exchange rates
  • state of world economy
  • degree of protectionism
  • non-price factors
37
Q

what is the paradox of thrift?

A

higher savings and reduced investment both reduce demand and income, it makes sense for indivduals to save if they are uncertain but this casues buisnesses to need less workers ➡️what appears to be rational could be argued as irratioaal

38
Q

how does investment cause short run economic growth?

A
  • increased investment will lead to an increase in AD which will lead to short run/real economic growth
39
Q

how does investment cause long run economic growth?

A

the purchase of capital will lead to an increase in a country’s productive potential, shown by a shift in the PPF curve and the long run aggregate supply curve

40
Q
A
41
Q
A

Macro economics (22 decks)

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