aggregate demand

Question 1

definition of AD

Answer 1

Total expenditure on a country’s goods and services measuring the total spending taking place in the economy

Question 2

Equation for aggregate demand

Answer 2

AD= C+I+G+(X-M)

Question 3

Describe what happens when the price levels decrease

Answer 3

When the price levels decrease there is an increased / extension in aggregate demand therefore an increase in Real G D P

Question 4

What causes a change in aggregate demand

Answer 4

If consumption, investment, government spending, net exports increase or decrease

Question 5

Why is the aggregate demand curve downward sloping

Answer 5

Changing purely to do with reasons to do with price level

Question 6

How can the downward sloping half be explained by

Answer 6

The wealth effect, the trade effect, the interest effect

Question 7

Explain the wealth effect

Answer 7

If price levels decrease the purchasing power of income increases
People are richer meaning they’re more likely to spend their money on goods and services
increasing consumption
Consumption is purely increasing because price levels are changed therefore there will be an extension / contraction of aggregate demand
And the real gdp will increase or decrease

Question 7

Explain the trade effect

Answer 7

If price levels decrease exports become more competitive and imports become less competitive
If exports become more competitive there is greater demand for exports therefore revenues generated from exports increase which increases exports
Therefore there will be less spending on imports reducing the value of M
As a result purely because of the change in the price level the value of X - M will increase and therefore increase aggregate demand and real GDP

Question 8

The interest rate effect

Answer 8

Impacting consumption investment and net exports
If the price levels decreased interest rates can be kept lower in the economy as most central banks will adapt interest rates to meet the inflation target
If inflation is low the interest rates can be kept lower in the economy
If interest rates are lower that’s higher consumption and higher investments as the cost in borrowing is lower
Decreasing interest rates will reduce the value of exchange rates boosting exports performance
Interest rate links purely to result in changing price level

Question 9

What factors cause a shift in the aggregate demand curve

Answer 9

For changes in components of aggregate demand consumption investment government or net exports not price

Question 10

What’s a budget deficit and a budget surplus

Answer 10

Budget deficit means suspending of the government is greater than the taxation revenues in a year / fiscal year
Budget surplus is when the government spending is less than the taxation revenue in a fiscal year

Question 11

Definition of consumption

Answer 11

Consumption is a total spending by households on goods and services in the economy

Question 12

What’s the marginal prospensity to consume

Answer 12

The willingness of households to spend any extra income they earn

Question 13

Factors which may affect consumption

Answer 13

Interest rates
Consumer confidence
Asset prices
level of household in debtedness
Level of real disposable income
Expected future income
Level of savings
Tax rates
Job security

Question 14

Why would interest rates / availability of credit impact consumption

Answer 14

If the interest rates are caught the cost of borrowing falls and the rate of return on saving falls so the cost of borrowing falls there is an increase incentive for customers to borrow money and its cheese per to do so and spend the borrowed money on expensive items for example houses and cars

Question 15

Why would consume a confidence impact consumption

Answer 15

If there is a high consumer confidence there is a higher marginal prosperity to consume

Question 16

Asset prices impact consumption

Answer 16

This links to how wealthy people feel and therefore more likely to spend meaning a high marginal prosperity to consume asset prices include house prices share prices and bond prices if these increase people feel wealthier even though their income hasn’t changed

Question 17

how do you level of house indebtedness Change the level of consumption

Answer 17

If families are living in debt they’re more likely to save their money meaning less consumption

Question 18

level real disposable income impact on consumption

Answer 18

If there is an increase of disposable income There Will be an increase of real disposable income therefore increasing marginal prosperity to consume and increasing the level of consumption in an Economy

Question 19

What’s investment

Answer 19

Total plan spending by firms on capital goods produced within the economy

Question 20

What’s the accelerator theory of investment

Answer 20

The accelerator effect states that the level of planned investment is related to past change in income rather than the interest rates if it predicts that the investment spending in the economy is likely to be more volatile then spending as a whole

Question 21

The effects of business investment spending

Answer 21

A rise in capital investment will have an effect on both demand and supply including a positive multiplier effect on national income

Question 22

Demand side effects of investment spending

Answer 22

Increase spending on capital goods affects industries that manufactured this technology /capital

Question 23

The supply side effects of investment spending

Answer 23

Investment is linked to higher productivity and expansion in a country’s Productive capacity reduces unit costs

Question 24

Influences on investment

Answer 24

Interest rates
Business confidence
Level of corporation tax
Spare capacity
Level of competition
Price of capital
The rate of economic growth
Demand for exports

Question 25

Definition of government spending

Answer 25

Government spending is spending on state provided goods and services including public goods and merit goods

Question 26

Types of government spending

Answer 26

Transfer payments
Current spending
Capital spending

Question 27

What is transfer payments

Answer 27

Payments made by the government to individuals or groups without expecting any goods or services in return for example state pensions disability allowances child benefits welfare Benefits

Question 28

What’s the current spending

Answer 28

Spending on current goods and services for example wages of civil servants, teachers, nurses, doctors, armed and emergency services

Question 29

What’s capital spending

Answer 29

On improvements to the public sector infrastructure for example new and improved schools, hospitals, roads, rail links such as HS2, airports, Olympic facilities

Question 30

exports

Answer 30

Sold overseas inflow of demand / injection Into our circular flow of income and spending added to the aggregate demand

Question 31

Import

Answer 31

A withdrawal of demand / leakage From the circular flow of income and spending

Question 32

nettrade

Answer 32

Measures the value of exports minus The value of imports

Question 33

When net exports are positive what does this mean

Answer 33

There is a trade surplus adding to aggregate demand

Question 34

When net exports are negative what does this mean

Answer 34

That is a trade deficit reducing aggregate demand

Question 35

What does the U K have

Answer 35

Trade deficit

Question 36

Definition of saving

Answer 36

Represents a decision to postpone consumption the proportion of income saved is measured by household saving ratio which is the percentage of disposable income saved rather than spent

Question 37

Factors that may affect the savings ratio

Answer 37

Advise in real interest rates on saving deposits
Expectations of future job losses
Rising consumer confidence
Restriction On the availability of credit
Taxes on savings
Higher debt levels such as a larger mortgage
Saving for retirement

Question 38

whats the multiplier effect

Answer 38

happens where there is initial change in spending from consumers or businesses or the government( components of AD) leads to a larger and more widespread impact in economys total economy total output or income

Question 39

what does the multiplier effect show

Answer 39

how chnages in spending create a ripple effect throughout the conimy generating additional rounds of economic activity

Question 40

example of multiplier effect

Answer 40

when an individual increases their spending the recipients of that spending then have more income which they then spend on goods and services

Question 41

how does the muliplier effect increase factor incomes

Answer 41

creates additional demand prompting businesses to create more supply and hire more workers resulting in higher factor incomes

Question 42

definition of multiplier effect

Answer 42

final change in equilibrium national output resulting from an intial change in aggregate demand

Question 43

whats a positive multiplier effect

Answer 43

when an intitial increase in an injection( gov spending, exports, investment) leads to a greater final increase in the level of real gdp

Question 44

whats a negative multiplier effect

Answer 44

an initial decrease in an injection ( imports, saving, tax) leads to a greater final decrease in the level of real gdp

Question 45

factors that effect the multiplier value

Answer 45

marginal propensity to consume
leakages
degree of spare capacity
time frame

Question 46

explain marginal propensity to consume infulence in multiplier effect

Answer 46

a higher MPC leads to a larger multiplier effect as consumers tend to spend larger proportions of their income increasing the overall spending in the economy leading to further rounds of spending stimulating economic growth

Question 47

explain the influence of leakages on the multiplier effect

Answer 47

leakages reduce the size of the multiplier. if people save a large proportion of their income or if a large portion of their spending is in the form of imports, taxes— multiplier effect= smaller

Question 48

how does the degree of spare capacity influence the multiplier effect

Answer 48

if economy is operating close to its full potential with little spare capacity multiplier effect limited

If there is lots of spare capacity that means that there are unused resources and potential for increased production this can have a positive impact on the multiplier effect as it allows for more injections into the economy such as increased investment or government spending these can then lead to further economic activity and stimulate growth creating a multiplier effect

Question 49

how does time frame influence the multiplier effect

Answer 49

short run- capacity constraints and restriction policys limit the size of the multiplier although in the long run adjustments in production capacity, investments and resource allocation lead to a larger multiplier

Question 50

whats marginal propensity to consume and the formula

Answer 50

measure of proportion of an increase in come that a person or household is likely to spend on consumption

formula= change in consumption/ change in income

Question 51

whats marginal propensity to save and formula

Answer 51

changes in household savings resulting in a change in household disposable income#

formula - change in total savings/ change in income

Question 52

whats the accelorator effect

Answer 52

positive relationship between planned capitial investment and the rate of change of national income

Question 53

what might happen in an industry where demand is rising quickly

Answer 53

respond initially by using exsiting capacity more intensively or running down stocks

if they expect high demand will be sustained they might increase capital spending to increase production

this all causes a positive accelorator effevt as a rise in demand for consumer goods and services will cause a bigger percentage chnage in demand for captital goods

Question 54

what does the accelorator effect suggest

Answer 54

level of investment in an economy is related to the chnage in real GDP , a higher rate of economic growth causes more investment

if the rate of economic growth is slowing but the economy is still growing the level of investment might fall

Question 55

overall conclude

Answer 55

an increase in the rate of real GDP in the economy encourages further investment which increases rate of GDP which encorages more investment etc etc

Question 56

factors which influence the level of economic activity

Answer 56

employment- influences production and consumption

confidence- influences the level of spending and investment

events- natural disasters and celebrations e.g., christmas influence the level of consumer spending

other factors- interest rates

Question 57

definition of economic activity

Answer 57

production, distribution and consumption of goods and services within an economy

Question 58

what is the trade/business cycle

Answer 58

refers to stage of economic growth the economy is in it goes through booms and bursts

Question 59

explain the cycle

Answer 59

real GDP increases when there are periods of economic growth- recovery stage

the boom is when economic growth is fast and could be inflationary or unsustainable

during reccessions the real GDP of the economy falls - negative economic growth - government might increase spending to try and stumulate the economy: welfare payments, cutting taxes etc increase government deficit

durring periods of economic growth governemnts may recieve more tax revenue since customers will be spending more VAT and earning more- income tax- govs spend less as economy doesnt need stimulating