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Econ - T2 - Macro > Aggregate Demand > Flashcards

Aggregate Demand Flashcards

1
Q

Definition of Aggregate Demand

A

Total amount of spending on goods and services at a given price level in a year

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2
Q

What are the 4 components of AD (e.g. the equation)

A

AD = C + I + G + (X-M)
- C = Consumption –> most significant 60% of total
- I = Investment - 3rd most significant - fluctuates on economy performance
- G = Government Expenditure - Significance increases during downturns/ recessions e.g. 2008 or COVID-19 - 2nd Significant
- X-M = Exports - Imports

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3
Q

Why is the AD curve downwards facing?

A
  • The Real Balance effect –> when Price Level ↑, Purchasing power ↓, leading to a decrease in D for R. Output
  • International Trade Effect –> Price Level ↑, International Competitiveness ↓, D. Exports ↓, D. Imports ↑–>Contraction in AD
  • Interest Rate effect –> ↑Price level –> ↑D for Money –> Interest rates ↑, ↓Consumption and Investment –> Contraction in AD
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4
Q

Draw an AD curve

A

AD curve downwards sloping
Y Axis = Price Level
X Axis = R. GDP

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5
Q

What Causes a Movement Along AD Curve Vs. Shift in AD Curve?

A

Movement Along = △Price Level

Shift = When one of C+I+G+(X-M) Changes
AD↑ = Curve shifts Right / Outwards
AD↓= Curve Shifts Left / Inwards

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6
Q

What is Disposable Income?

A

Money people have available to spend on Goods + Services
–> Important in Consumption

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7
Q

How do you work out the Average Propensity to Consume and Average Propensity to Save?

A

APC = Consumption / Disposable Income x 100
–> Proportional of Dispo. Income spent on Consumption
APS = Savings / Disposable Income x 100
–> Proportion of Dispo. Income spend on Saving

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8
Q

What is the Interest rate? + influence on Consumption

A

the cost of borrowing / reward for saving
- Interest rates↑, Cost of Borrowing ↑, Opportunity Cost of spending ↑ –> Consumption ↓

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9
Q

List 5 things that have an influence on Consumption

A
  • Intrest Rates
    –> Interest rates↑, Cost of Borrowing ↑, Opportunity Cost of spending ↑ –> Consumption ↓
  • Consumer Confidence
    –> Confident / Secure (Economy expectations high) likely to buy high value items –> Consumption ↑
  • Wealth Effect
    –> House/ Share Price ↑ –> feel wealthier –> Consumption ↑
  • Disposable Income
  • Employment
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10
Q

What is the Wealth Effect + influence on Consumption?

A

the effect on spending when asset prices change
–> House/ Share Price ↑ –> feel wealthier –> spend more –> Consumption ↑
e.g. house worth more, can take out larger loan

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11
Q

Define Investment Vs. Gross Vs. Net Investment + Which is more usefull

A

Investment
- Increase in the Capital Stock

Gross Investment
- Total expenditure on new capital Good

Net Investment
- New Capital stock with fall in value (depreciation) taken into account

–> Met pre useful as prospect for economy

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12
Q

List 5 things that can influence Investment

A
  • Economic Growth
    –> ↑R.GDP –> ↑Investment
  • Business Confidence / Expectations
    –> Confidence ↑ –> Investment ↑
  • D. for Exports
    –> ↑D. for Exports –> ↑Investment
  • Interest rates
    –> Interest rates ↑ –> Cost of borrowing Money ↑–> Investment ↓
    –> 2008 Financial crisis, Banks unwilling to lend despite low interest rates –> Investment ↓
  • Government
    –> Gov policy e.g. taxation –> Cut in Corporation Tax –> Investment ↑
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13
Q

How does Economic Growth Impact Investment

A
  • ↑R.GDP –> Firms need more Capital –> ↑Investment –> virtuous cycle
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14
Q

How does Business Confidence / Expectations effect Investment?

A
  • Confidence ↑ –> Investment ↑
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15
Q

How does D. For Exports effect Investment?

A
  • ↑D. for Exports –> ↑Investment
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16
Q

How do Interest rates effect Investment?

A

Interest rates ↑ –> Cost of borrowing Money ↑–> Investment ↓

–> However, Low interest rates not guarantee investment –> 2008 Financial crisis, Banks unwilling to lend despite low interest rates –> Investment ↓

17
Q

How does the Government effect Investment?

A

Gov policy e.g. taxation
–> Cut in Corporation Tax –> Investment ↑
Planning restrictions relax –> Investment in building projects ↑

18
Q

What is the trade cycle? + how does this effect Gov. expenditure?

A
  • Fluctuations in GDP around the LR trend in Econ growth
  • Downturn –> Gov Expenditure↑ (e.g. welfare benefits ↑)
19
Q

What are the two main Influences on Gov. Expenditure?

A
  • Trade Cycle
    –> - Downturn –> Gov Expenditure↑ (e.g. welfare benefits ↑)
  • Fiscal Policy
20
Q

What is Fiscal Policy + how does it influence Gov. Expenditure?

A
  • Gov expenditure on taxation to influence level of Economic Activity

–> Gov deliberately change spending in economy by changing own spending

21
Q

How do you calculate Net. Trade?

A

(X-M) –> (Exports - Imports)
–> in UK normally negative

22
Q

List things that Influence Net. Trade?

A
  • R. Income
    –> Income ↑ –> Incentive for Firms to Export ↓
    –> Income ↑ –> D. Imports ↑
    –> Net Exports ↓
  • Exchange Rate
    –>Exchange Rate ↑–> Net Trade ↓ (International Competitiveness ↓)
    –> SR Net Trade ↑ due to inelastic Demand
  • World Economy
    –> eg. COVID-19 global recession –> ↓D. Exports
  • Protectionism
    –> tariffs –> Net Trade ↓
  • Non-Price Factors
    –> Quality / Design
23
Q

How does R. Income effect Net Trade?

A

Income ↑ –> Incentive for Firms to Export ↓
Income ↑ –> D. Imports ↑
Net Exports ↓

24
Q

How does Exchange rate effect Net Trade?

A

Exchange Rate ↑–> Net Trade ↓ (International Competitiveness ↓)
–> SR Net Trade ↑ due to inelastic Demand

25
Q

How does the World Economy impact Net Trade?

A

Exports dependent on world growth rates
–> eg. COVID-19 global recession –> ↓D. Exports

26
Q

How does protectionism influence Net Trade?

A

high tariffs (on imports to countries) means exporting is harder / more expensive
–> Net Trade ↓

27
Q

List some Non-Price factors that could influence Net Trade?

A
  • Quality / Design
  • Transport Costs
  • Reliability

Econ - T2 - Macro (10 decks)

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