3.2: UK macroeconomy

Question 1

Aggregate Demand =

Answer 1

Consumption (C) + Investment (I) + Govt Spending (G) + (X-M)
AD shift becuase of any of these factors i.e. if firms more confident, they are more likely to borrow in order to finance investment

Question 2

Demand-shock

Answer 2

Anything that causes AD to change

Question 3

What is and what happens when there is negative shock?

Answer 3

May be interest rate rise or crach in housing market etc. -> fall in GDP -> knock-on effect on confidence -> further falls in inactivity -> multiplier + accelerator effects could magnify thr impact of any initial negatice shock -> keynesians may suggest government intervention required at this point

Question 4

What are movements along the AD curve caused by?

Answer 4

Change in price level i.e. rise in price causes contraction in AD

Question 5

What happens to real incomes if average price level rises?

Answer 5

Fall in real value of income

Question 6

What happens to the balance of trade if the average price level of a foreign country falls?

Answer 6

Domestic consumers would demand more imports, causing a contraction in AD

Question 7

What happens to interest rates if average price level rises?

Answer 7

Will be inflation -> interest rates rise to counter this

Question 8

Facors affecting the level of saving

Answer 8

Interest rate
Consumer confidence about the future
Wealth effects
Inflation exepctations
Level of income

Question 9

Investment

Answer 9

Any expenditure that increases the capital stock of a country

Question 10

What do banks do with savings in bank accounts?

Answer 10

They recycle the savings and lend to companies. Allows them to invest in long-term projects

Question 11

Gross investment

Answer 11

Total amount companies spend on investment

Question 12

Net investment =

Answer 12

Gross investment - depreciation.
Depreciation is the dterioration of assets over time i.e. cars

Question 13

How is investment measured?

Answer 13

As a % of GDP. GDP high = investment high

Question 14

What does a high rate of economic growth signal?

Answer 14

Economic strength -> gives businesses confidence in future -> will invest to increase productive capacity , expecting increases in demand to continue in future

Question 15

Keynes ‘Animal Spirits’

Answer 15

Overly invest in goods times, underinvest when consumer spending is weaker and business confidence is lower

Question 16

Export demand

Answer 16

If international demand for a good rose, likely would invest to increase capacity of production

Question 17

Interest rates

Answer 17

Cost of borrowing, reward for saving

Question 18

What happens if firms have higher access to credit?

Answer 18

More likely to invest

Question 19

What is it when governments subsidies certain industries i.ee healthcare or renewable energy?

Answer 19

Government regualtion

Question 20

Fiscal policy

Answer 20

Changing government spending and taxation, according to economic conditions

Question 21

Contractionary policy decreases AD by decreasing:

Answer 21

• Consumption
• Investment
• Government spending
  Shifts AD left as AD has fallen

Question 22

Expansionary fiscal policy increases AD by:

Answer 22

• Increasing government spending
• Cutting taxes
  Shifts AD right as AD has increased

Question 23

What can expansionary fiscal policy cause?

Answer 23

Tax cuts -> more disposable income -> higher consumption
Cutting business taxes -> rise in investment
Government spending rises -> higher government spending i.e. new hospitals/schools

Question 24

What does a trade cycle display?

Answer 24

A countries economic growth

Question 25

Four different phases of a trade cycle

Answer 25

Boom - building economic growth
Peak - climax of economic growth + rates starting to fall
Economic downturn - economic growth rate falling
Trough - bottom of cycle + growth rates start to rise

Question 26

What happens if there is a boom?

Answer 26

More govt spending
Higher incomes to govt as they receive more revenue due to tax
Pay less benefits

Question 27

What happens in economic downturn?

Answer 27

Less govt spending
Less income to govt as receive less revenue due to tax
Pay more benefits

Question 28

Main UK exports

Answer 28

Financial services, cars, wholesale medicines, gas trubines, petroleum and gold

Question 29

Leading recipients of UK exports

Answer 29

USA, Germany, Holland and France

Question 30

Why is there a decrease in UK exports to EU?

Answer 30

Brexit and rapid growth of Brazil, China, Russia and India

Question 31

Why is there an increase of UK exports of financial services?

Answer 31

Due to London growing as a financial hub

Question 32

Main UK imports

Answer 32

Cars, vehicle parts, aircraft, gold, petroleum and wholesale medicines

Question 33

Main UK suppliers

Answer 33

Germany, China, USA and Holland

Question 34

Where do UK imports come from?

Answer 34

Over 50% come from EU but rapid growth of China means increased imports from there

Question 35

Why have the UK imported more manufactured goods?

Answer 35

Due to a decline of the UK being an industrial nation -> worsens the trade deficit

Question 36

Factors influencing net trade

Answer 36

Spare capacity - how much spare capacity to store resources. Less there is, more raw materials imported
Relative income - higher domestic income, higher marginal propensity to import
Exchange rates - determines relative prices of exports + imports
Inflation rates - relative inflation rates affect domestic Vs international prices
Protectionism - if country introduces protectionist policies, imports less desirable. Protectionism is an attempt to improve the ratio of exports to imports and increase AD