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Economics Year 1 - Macro > 4.2 A - Aggregate Demand > Flashcards

4.2 A - Aggregate Demand Flashcards

1
Q

Aggregate Demand

A

the total expenditure on an economy’s goods and services at any given price level.

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2
Q

consumption

A

total spending by consumers on domestic goods and services

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3
Q

Investment

A

Spending that increases the size of a nations capital stock

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4
Q

Government Spending

A

Spending set by the government to inject economic activity into an economy

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5
Q

Net exports (X -M)

A

Net trade component: export revenues less import expenditure

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6
Q

How much does consumption make of the UK’s GDP

A

66%

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7
Q

How much does investment make of the UK’s GDP

A

18%

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8
Q

How much does government spending make of the UK’s GDP

A

20%

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9
Q

How much does net exports make of the UK’s GDP

A

-4%

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10
Q

What is the equation for Aggregate demand

A

AD = C + I + G + (X-M)

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11
Q

How do you draw an AD graph

A

X axis - real output
Y axis - price level

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12
Q

What direction does the AD graph slope

A

Downwards - As the average price level falls, AD increases and real output increases

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13
Q

movement on AD graph

A

When the average price level in an economy changes

real output changes with the price level

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14
Q

Shift on AD graph

A

Any other relevant factors affecting AD other than price level

real output changes at every given price level

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15
Q

Wealth effect definition

A

Shows how the price level affects real incomes

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16
Q

Trade effect definition

A

Shows how the price level affects trade patterns

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17
Q

Interest Rates effect definition

A

Shows how the price level effects borrowing costs

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18
Q

price level definition

A

Buying power of money - inflation

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19
Q

Wealth effect short-run explained

A

In the short-run Income and wealth positions are unchanged

20
Q

Wealth effect exaplained

A

price level decreases
real output increases
- people feel wealthier and spend more, increasing Consumption and movement down the AD curve

Vice versa

21
Q

Trade effect explained

A

Assuming ceteris paribus
If domestic prices decrease –> demand for exports increases
If domestic prices decrease –> demand for imports decreases

causes movement in AD curve to the right

22
Q

What is the relationship between price level and real output (AD graph)

A

Inversely proportional

As price level decreases real output increases

23
Q

how do interest rates decrease when price level decreases

A

Consumers need money to purchase things… If
Price level decrease
Asset demand increases - put into savings…

As assets prices increase the return on that asset decreases
causing interest rates to decrease

Therefore
price level decrease
interest rates decrease

24
Q

How does interest rate effect, effect AD

A

Interest rates decrease, means more borrowing
Investment increases
Consumption increases
AD moves downwards

25
Q

Inward AD shift

A

Ad decreases at every given price level and real output is lower

26
Q

outward AD shift

A

Increase in AD at every given price level, real output is higher

27
Q

factors AD in an economy (causes shifts)

A

Shifts occur due to a change in an AD component which may change due to:
- Confidence
- exchange rates
- Interest rates
- Population rates
- Wealth changes
- Tax changes

28
Q

Which components does confidence effect in an AD graph

A
  • C
  • I
  • G
  • M
  • not X because thats to do with foreign demand
29
Q

Which components does exchange rates effect in an AD graph

A
  • X
  • M

WPIDEC
SPICED

30
Q

Which components does interest rates effect in an AD graph

A

-C
-I
-G
-X
-M

31
Q

Which components does Population changes effect in an AD graph

A
  • C
    -I
    -G
    -M
32
Q

Which components does Wealth changes effect in an AD graph

A

-C
-I
-M

33
Q

Which components does tax changes effect in an AD graph

A

-C
-I
-M

34
Q

What shifts does confidence cause on AD

A

Rises:
Positive AD impact

Falls:
Negative AD impact

35
Q

What shifts does exchange rates cause on AD

A

Rises:
Negative impact on AD

Falls:
Positive AD impact

36
Q

What shifts does Interest rates cause on AD

A

Rises:
negative AD impact

Falls:
positive AD impact

37
Q

What shifts does population changes cause on AD

A

Rises:
Positive AD impact

Falls:
Negative AD impact

38
Q

What shifts does wealth changes cause on AD

A

Rises:
Positive AD impact

Falls:
Negative AD impact

39
Q

What shifts does Tax changes cause on AD

A

rises:
Negative AD impact

Falls:
Positive AD

40
Q

multiplier effect

A

The process by which expenditure generates a trail of subsequent expenditure so that the resultant change in national income will exceed the amount initially expended.

41
Q

propensity to consume

A

the proportion of income that is used to buy goods and services

42
Q

the average propensity to consume

A

The proportion of total income that is consumed
= consumption / income

43
Q

marginal propensity to consume
MPC

A

the proportion of a change in income that is consumed

= change in consumption / change in income

44
Q

multiplier effect formula

A

1 - mpc

45
Q

Marginal propensity to save
MPS

A

the proportion of total income that is saved

46
Q

MPS + MPC

A

= 1

47
Q

How does the multiplier effect work

A

> gov spends 100
–> person 1 spends 50 and saves 50
—–> person 2 spends 25 and saves 25
———> person 3 spends 12.5 and spends 12.5

assuming the MPC and MPS are the same:

initial spent = 100
multiplier of 1/0.5 = 2
total spending = 200

Economics Year 1 - Macro (4 decks)

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