AD ( 2 )

Question 1

How do technical advances affect investment?

Answer 1

• Firms need to invest in new technology to stay competitive

* Investment will rise when significant technological advances are made.

Question 2

How do interest rates & credit affect investment?

Answer 2

• Firms may borrow money to invest
- High interest rates/Firms unable to access credit, firms will be less likely to invest: cost of borrowing the money is higher.
- High interest rates would reduce how profitable an investment would be
- High interest rates would mean there is a greater opportunity cost of investing existing funds instead of saving.
- High interest rates make firms expect a fall in consumer expenditure, which will discourage investment ( recent profits ).
• Low interest rates/Access to credit:
- Cost of borrowing is less.
- Encourages consumer expenditure

Question 3

How do government regulations/incentives affect investment?

Answer 3

• Government incentives such as subsidies, or reductions in taxes ( corporation tax ), can affect the level of investment. A reduction in corp tax will provide firms with more funds to invest.
• Relaxing of government regulations might reduce a firms cost and make it more likely to invest.
• Lower tax = greater amount of profit kept = encourages investment

Question 4

How do business expectations/confidence affect investment?

Answer 4

• If firms expect a high rate of return, they will invest more.
• More confident a business is in its ability to make profits ( e.g. export demand is high ), the more money it is likely to invest.

Question 5

What is government spending ( AD )?

Answer 5

Money spent by the government on public goods & services.

Question 6

Why are pensions not included in government spending?

Answer 6

They are not spent on a good or a service, instead pensions are a transfer payment, no output is derived from them, and is a transfer of money from one group to another.

Question 7

What part of government spending is included?

Answer 7

• Spending that directly contributes to the output of the economy.
• Benefits/Pensions not included, no output derived.

Question 8

What influences government spending?

Answer 8

• Economic Growth

* Fiscal Policy

Question 9

How does economic growth affect govt spending?

Answer 9

• During recessions, governments might increase spending to try and stimulate the economy.
• Govt deficit increased
—–
• During periods of growth, govt may receive more tax, since consumers will be spending more & earning more.
• Less spend as the economy requires less stimulating

Question 10

How does fiscal policy affect govt spending?

Answer 10

• Govt uses fiscal policy to influence the economy, involves changes to gov spending/taxation
• Gov might spend on public & merit goods as well as welfare payments

Question 11

What does a budget deficit indicate?

Answer 11

Overall injection into the circular flow

Question 12

What does a budget surplus indicate?

Answer 12

Overall withdrawal from the circular flow

Question 13

What does a long term surplus indicate?

Answer 13

Harming economic growth by choosing not to spend, or keeping tax too high

Question 14

What does a long term deficit indicate?

Answer 14

Large national debt

Question 15

What are exports?

Answer 15

Goods/Services that are produced in one country, then sold in another.

Question 16

What are imports?

Answer 16

Goods & Services that are brought into one country after being produced elsewhere.

Question 17

What kind of effect do imports & exports have on an economy?

Answer 17

• Exports are an inflow of money to a country, an injection

* Imports are an outflow into an economy, withdrawal from the circular flow of income.

Question 18

What factors influence net trade balances?

Answer 18

• Real income
• Exchange Rates
• State of the world economy
• Degree of protectionism
• Non price factors

Question 19

What are net exports?

Answer 19

Export - Import

X - M

Question 20

How does a strengthening pound affect net exports?

Answer 20

• Imports become relatively cheaper
• Exports become relatively more expensive
Exports are relatively more expensive for foreigners.
- Demand for exports falls
- Demand for imports rises
Strong currency worsens net exports, and will reduce AD.

Question 21

How does a weak pound affect net exports?

Answer 21

• Imports become more expensive
• Exports are cheaper
• Trade deficit narrows
- Exports are relatively cheaper for foreigners
Demand for exports rises
Demand for imports decreases
Weak currency betters net exports, increases AD, greater exports, reduce imports.

Question 22

SPICED

Answer 22

S - STRONG
P - POUND
I - IMPORTS
C - CHEAP
E - EXPORTS 
D - DEAR