AD

Question 1

Aggregate demand is made up of the following components

Answer 1

Consumption (c) + investment (I) + government expenditure (g) + net trade (exports - imports)

Question 2

Definition AD

Answer 2

The total amount of planned spending on goods and services at any price level in an economy

Question 3

Movements along the AD curve occur when

Answer 3

There is a change in price level caused by factors that are not related to AD (eg changes in supply)

Question 4

Consumption: interest rates

Answer 4

If rise, then costs more to borrow, and increases the oppurtunity cost of spending (ie saving). More money earned by leaving money in the bank

Question 5

Consumption: consumer confidence

Answer 5

If households feel secure about their jobs and future prospects for the economy, then they are more likely to buy big-ticket items such as new cars etc. Because of this, what people think is going to happen to the economy has a big influence on what does actually happen

Question 6

Consumption: wealth effect

Answer 6

An increase in share or house price means that households are willing and able to spend more. For example, if house is worth more, a larger loan may be taken out for the house, and if shares go up, may be more willing to book an expensive holiday, even they don’t sell the house or shares,

Question 7

Consumption: the level of employment

Answer 7

The higher the level of employment the more will be spent in the country (which can lead to higher employment)

Question 8

Investment: the rate of economic growth

Answer 8

If there’s an increase in real GDP then firms will need more capital in order to meet the increased demand, So an increase in real GDP causes investment to rise, and an increase in investment causes GDP to rise. Cycle

Question 9

Investment: confidence levels

Answer 9

If firms think that they will sell more in the future, they are more likely to invest today

Question 10

Investment: interest rates

Answer 10

I’d rise, investment tends to fall because it costs more to borrow

Question 11

Investment: animal spirits

Answer 11

Term used by Keynes.
Sometimes consumers and firms are not totally rational, and they act on gut instinct.
According to Keynes, investment doesn’t happen automatically- an additional boost might be needed by government. Firms might look at evidence that suggest an investment is worthwhile, but may need more than this to spur them into action. Consumers might decide they can afford to spend more but may need something to trigger the spending. Similarly, when prices and investment rise too quickly the government might need to intervene to calm down inflationary bubbles.

Question 12

Investment: risk

Answer 12

Higher the risk, lower level of investment

Question 13

Investment: access to credit

Answer 13

Low interest rates don’t necessarily mean that all firms can borrow cheaply. Banks might not be willing to take risks in their lending. In the after math of the credit crisis, firms often found it difficult to borrow even if they wanted to

Question 14

Investment: government decisions

Answer 14

Changes in government decisions and rules have a significantly impact of capital spending, especially if firms have to face fines if they do not react. Government policy might mean changes in tax rates which directly effect firms. Eg the government cut corporation tax so firms are likely to invest

Question 15

Investment: government beurocracy

Answer 15

If the government relaxes planning restrictions- as they have done recently with building in the UK- firms are more likely to invest in building projects

Question 16

Government expenditure (fiscal policy)

Answer 16

Make set decision son spending and taxation.
Can spend more or less than earns in taxation
If spend more than earns,its a fiscal or budget deficit
If spend less than earns, its a fiscal or budget surplus
They automatically spend more in a recession (on benefits and taxes fall as workers have less income)
Spend less in boom as tax rise as wages and employment rises

Question 17

Net trade, causes of change in net exports: real income

Answer 17

If incomes rise, reduced incentive for domestic firms to export, because they can sell their goods and services in the domestic economy

Question 18

Net trade, causes of change in net exports: change in exchange rate

Answer 18

If rises, net exports are likely to fall as exports become less competitive abroad and imports become more competitive in domestic economy. However, in the short run a strong exchange rate might increase exports and decrease the value of imports, as spending patterns do not adjust quickly to price changes. People take time to adjust

Question 19

Net trade, causes of change in net exports: changes in the state and world economy

Answer 19

The value of UK exports is heavily dependent on growth rates around the world. The slowdown in the euro one has caused UK exports to fall, especially to Spain. The crisis in the eurozone has meant that spending on Chinese imports has been drastically reduced, causing Chinese growth rates to fall because China is heavily dependent on exports to the eurozone

Question 20

Net trade, causes of change in net exports: the degree of protectionism

Answer 20

If there are high tariffs, quotas or other restrictions on trade, the firms will find it difficult to export to certain countries

Question 21

Net trade, causes of change in net exports: non- price factors

Answer 21

Demand for exports and imports determined by many things apart from price, such as quality of engineering, reliability of after-sales service, transport costs