AD & AS Flashcards
What are the four components of AD?
Consumption.
Investment.
Government Spending.
Balance of trade (exports - imports).
What is the largest component of AD?
Consumption/ consumer spending.
What percentage of UK GDP does consumption make up?
Just over 60%.
How do fluctuations in interest rates affect consumption in AD?
If interest rates are high, the incentive to save is higher, but the cost of borrowing is higher, this means people are likely to spend and invest less.
If interest rates are low, the incentive to save is lower, and the cost of borrowing is reduced therefore people will spend and invest more.
By lowering the cost of debt, people will also have more disposable income.
Why is changes in interest rates not a good idea if a rise in AD is needed immediately?
Because there are time lags of around 18 months.
How does consumer confidence effect AD?
If consumers and firms have higher confidence levels, they are more likely to spend and invest as they feel they will get a higher return on them.
If confidence is low, consumers will often fear unemloyment or high tax which will make them save more and spend less.
What is the smallest component of AD?
Investment.
What percentage of the UK GDP does capital investment make up?
Around 15-20%
How does the rate of economic growth effect investment in AD?
If growth is high, firms will be making more revenue due to higher consumption, resulting in more profits to invest.
How does fluctuations in interest rates effect investment in AD?
As interest rates fall, the incentive to save will fall, and therefore firms and individuals will invest more.
How does access to credit effect investment in AD?
If banks and lenders are relcutant to lend, firms will find it harder to access credit making it either impossible or more expensive to gain the funds for investment.
How does taxation effect investment in AD?
Lower corporation tax could mean firms retain more profits, encouraging investment.
Lower direct tax on consumers means they have more disposable income to invest.
What percentage of UK GDP does government spending make up?
18-20%.
How does economic growth affect government spending in AD?
During recessions, govs will increase spending to try to stimulate the economy (this could be by cutting taxes or welfare payments)
During periods of growth, govs may recieve more tax revenue as consumers will be spending more, less people will be claiming benefits and the economy does not need stimulating.
How does fiscal policy affect government spending in AD?
Expansionary fiscal policy may be used in times of economic decline in order to boost AD through reducing taxes or increasing spending.
Contractionary fiscal policy may be used in times of economic growth to reduce AD through decreasing expenditure and increasing tax.
How does the balance of trade in the UK affect our AD?
The trade defecit reduces our AD.
How does real income affect the balance of trade in AD?
During economic growth, consumers feel they have higher incomes and can afford to consume more; both domestically and internationally.
During economic decline, real incomes fall, which means people will be importing less, leading to improvements in the UK’s current account.
How do exchange rates affect the balance of trade in AD?
SPICED.
Depreciations make the currency more competetive against others.
The demand for UK expirts has to be price elastic to lead to an increase in exports.
How does the state of the world economy affect the balance of trade in AD?
A decline in economic growth in one of the Uk’s main export markets will lead to a fall in exports as consumer spending in those economies will fall.
How does the degree of protectionism affect the balance of trade in AD?
If the UK employed several protectionist meaures then the trade defecit will reduce as the UK will be importing less as a result of the tariffs and quotas on imports.
How does non-price competition affect balance of trade in AD?
By being innovative, having higher quality goofs and services, operating in a niche market, having lower labour or land costs, being more productive or having better infrastructure increases exports.
Trade blocs can either open a country up or block it off to potential export oppurtunities.
What causes shifts on the SRAS curve?
When there are changes in the conditions of supply such as price level and production costs.
Why is the LRAS curve vertical?
In the long run, an economy’s potential output is determined by factors other than the price level, such as the availability of resources and level of technology.
Why does the Keynesian LRAS curve depict exponential growth?
It reflects a possibility of an economy operating below full employment for extended periods.
