Aggraggregatevdemand Flashcards
Define aggregate demand
The total value of planned expenditure on goods and services produced in an economy in a given period of time
What factors affect the level of consumption?
Wealth Levels
Income Levels
Future expectations of inflation
Consumer confidence
Unemployment levels
Job security
Define Investment
The expenditure that increases the capital stock of a country
What are factors affecting investment
Interest rates
Future growth and demand
Profitability
Government policies (subsidies)
Efficiency of financial system
What is current spending by the government ?
On transfer payments such as benefits or salaries / utility bills
What is capital spending by the government?
On long term spending that increases the productive capacity of the economy, eg infrastructure projects
What factors affect the levels of government spending?
Cost of borrowing
Fiscal deficit/or debt targets
Levels of national debt
State of the economy
Confidence in the economy
Political bias
What factors affect the levels of imports and exports
The exchange rates determines relative prices of exports & imports
The quality of goods affects international competitiveness.
Relative inflation rates affect domestic vs international prices.
Relative levels on income- higher the domestic income, the highest the marginal propensity to import.
How much spare capacity there is to supply resources. The less there is,the more raw materials will need to be imported.
What are savings
Savings is the part of disposable income that is not spent
True or false, investments are a form of saving.
True
5 factors that affect the level of saving
-the interest rate
-the level of consumer confidence about the future
-job security
-inflation expections
-level of income
Why do inflation expectations affect the level of saving
If prices are going to rise in the future, people may spend now and save later
What is the accelerator process?
It links the growth in real income to a change in the rate of investment.
It helps to explain why investment is so volatile.
What determines relative prices
Exchange rates
Define aggregate supply
As is the total quantity of output firms will produce and sell at a given price level
What causes a shift in the SRAS curve
Business costs: labour and raw material costs may rise.
Exchange rates: the exchange rate may lead to a higher price of imports
The government can impose taxes which can incraese the cost of producing goods or services.
What is the savings ratio
Savings/ disposable income X 100
What type of relationship is between investment and AD
Positive
What happens to investment when there is an increase in national income
Will see a larger proportional change in investment
What is the multiplier
When a change in AD leads to a larger proportional change in national income
How do you calculate the multiplier
Change in national income/ change in injection
Explain the multiplier in terms of the CFoI
Injections into the economy will see a proportionally larger increase in national income
Withdrawals from the economy will see a proportionally larger fall in national income
What is meant by AS
The level of real national output that firms are prepared to supply at different price levels
What is the difference between SRAS ands LRAS
SRAS is when at least one factor of production is fixes
LRAS is when all factors of production can be varied
What are the main determinants of SRAS
The price level - changes in price level causes movements along the SRAS curve
Costs of production - fall in costs of production = shift right
What are supply-side shocks
Unexpected events which impact the supply-side of the economy
How do the factors of quality and quantity of fop impact LRAS
Higher quality = higher production output
Higher quality - higher productivity
What is factor mobility and how does it impact LRAS
The ease at which fop can be used for other purposes
More mobile = the quicker the resources can be allocated to enable maximum output
How can supply-side shocks impact LRAS
Can shirt LRAS to the left
What does an increase in ad to to SR macroeconomic equilibrium
As AD increases supply extends
Real output increases
Price level increase
How does a decrease in AD impacts SR macroeconomic equilibrium
As AD falls supply contracts as firms reduce output
Real output falls
Price level falls
What is meant by SR macroeconomic equilibrium
Where AD =SRAS
What is meant by long run macroeconomic equilibrium
Where AD=SRAS=LRAS
Also known as full employment equilibrium
How does an increase in AD impacts LRME
Would take economy beyond full capacity
Real output increase
Price level increases
How does a fall in AD impact LRME
Would see the condo my working at less than full capacity
Real output falls
Price level falls
