2.4 aggregate demand and the level of economic activity

Question 1

what is economic activity

Answer 1

the production and consumption of goose and services in the economy

Question 2

how does aggregate demand influence economic activity

Answer 2

it decides how many goods consumers want to buy at each price level, which will be set when it is equal to the amount producers are willing to sell at that price level
so it effects the level of real output

Question 3

what is the multiplier effect

Answer 3

the relationship between a change in aggregate demand from either a injection or withdrawal from the circular flow of income, and the resulting, usually large, change in in national income
can be positive or negative

Question 4

give an example of a positive multiplier effect

Answer 4

a new firm opens in a town, needs to hire workers, buy materials, those receiving extra income from this will have more disposable income to spend in the economy, so demand expands again as other firms need to expand due to the increased AD, and the cycle begins

Question 5

give an example of a negative multiplier effect

Answer 5

due to higher cooperation tax, a firm closes its factory, this leaves people unemployed, AD will drop as they will likely spend less, so as demand falls, output may also fall and other firms may need t cut expenses and make their own redundancies, creating a negative cycle

Question 6

give the formula for the value of the multiplier (K)

Answer 6

K = 1 % ( 1- MPC )

Question 7

what is the marginal propensity to consume (MPC)

Answer 7

fraction of disposable income which people plan to spend on consumption of domestic goods and services

Question 8

how does the size of the MPC determines the effect of the multiplier on the economy

Answer 8

if the MPC is high then the effects will be bigger

Question 9

what kind of process is the multiplier

Answer 9

a dynamic process, it takes place over time, it is not instant