4.2.2.4 aggregate demand and the level of econmic activity

Question 1

what factors influence the level of economic activity?

Answer 1

• employment
  -> influences production and consumption
• confidence
  -> influences level of spending and I
• events
• natural disasters/Christmas influence the level of C
• other factors
  -> like taxes and interest rates which influence how much firms and consumers borrow, save or spend

Question 2

what is the multiplier effect?

Answer 2

the number of times a rise in GDP exceeds the rise in injections that caused it

Question 3

what is the size of the multiplier based on?

Answer 3

how much of £1 extra will be re-spent in the economy

Question 4

when does the multiplier occur?

Answer 4

• when extra spending creates income for another person or businesses
• this extra income will in turn be spent again
• thus creating income elsewhere for another group etc etc etc

Question 5

how do we find out the size of the multiplier?

Answer 5

comparing the size of the overall change in national income with the size of the initial change in aggregate demand

Question 6

what’s a negative multiplier?

Answer 6

• fall in any components of AD leads to a proportionally larger fall in overall national income

Question 7

what is the marginal propensity to consume?

Answer 7

• the proportion of any additional income that’s spent and passed on around the circular flow of income
• will be a number between 0 and 1

Question 8

what does the size of the MPC determine?

Answer 8

• the size of the multiplier
• as the size of the multiplier depends in how much of any extra income is actually spent

Question 9

what’s the equation for the size of the multiplier?

Answer 9

1 / (1-MPC)

Question 10

what does a higher MPC mean?

Answer 10

• more of any additional income received is ‘passed on’ around the economy
• leading to further rises in national income
• as a result, a higher MPC means a larger multiplier