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Macro Economics > Aggregate Demand > Flashcards

Aggregate Demand Flashcards

1
Q

Define Aggregate Demand

A

Aggregate demand is the total of all demand or expenditures in the economy at any given price

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2
Q

Why is the curve downward sloping?

A

A rise in the price level will lead to a fall in the equilibrium level of national income and therefore of national output (GDP) due to the inverse relationship

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3
Q

AD Equation

A

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

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4
Q

Define price level

A

The average level of prices in the economy

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5
Q

Define consumption

A

Spending by households on goods and services

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6
Q

Define investment

A

Spending on capital goods and services

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7
Q

Define Government Spending

A

Spending by the public sector on goods and services such as education, health care and defence

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8
Q

Define Net Exports

A

A measure of a country’s total trade of goods and services, also known as the Balance of Trade

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9
Q

What causes a movement along the AD curve?

A

Changes in the GPL

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10
Q

What causes a shift of the AD curve?

A

Factors other than the price level

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11
Q

Keynesian beliefs of consumption

A

As incomes increase, consumption increases

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12
Q

Reason 1 for downward sloping curve: Real Income Effect

A

As GPL falls, real value of income rises, therefore consumers are more willing and able to pay for goods and services

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13
Q

Reason 2 for downward sloping curve: Interest Rate Effect

A

Higher interest rates increase the cost of borrowing, reduce disposable income and therefore limit the growth in consumer spending.

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14
Q

Interest rate

A

The cost of borrowing

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15
Q

MPC (Marginal Propensity to Consume)

A

The change in consumer spending arising from a change in disposable income

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16
Q

MPC Equation

A

MPC = change in C / change in Y

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17
Q

MPS (Marginal Propensity to Save)

A

The proportion of each added £ of income that is saved rather than spent

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18
Q

MPC + MPS =

A

1

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19
Q

3 Factors that influence the level of Consumer Spending

A
  1. General state of consumer confidence
  2. Availability and cost of consumer credit - affects willingness to borrow
  3. Inflation - rising inflation tends to erode the real value of money wealth. Households react to this by attempting to restore the real value of their wealth by saving more, reducing consumption
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20
Q

Define Consumer Confidence

A

An economic indicator that measures the degree of optimism that consumers have regarding the overall state of a country’s economy and their own financial situations.

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21
Q

APC (Average Propensity to Consume)

A

A measure of the fraction of the total disposable income consumed

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22
Q

APC Equation

A

APC = total consumption / total income

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23
Q

Physical wealth e.g.

A

Houses, cars, furniture

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24
Q

Monetary wealth e.g.

A

Cash, money in the bank, stocks and shares, pension rights

25
Q

If the wealth of a household increases, consumption… known as the Wealth Effect

A

Increases

26
Q

A real increase in the price of housing means households…

A

Feel able to increase their spending. This is mainly done by borrowing more money secured against the value of their house

27
Q

If the interest rate falls, the value of stocks will…

A

Rise, therefore consumption should be stimulated.

28
Q

Interest rates are another factor which determine consumption. Households often finance expenditure on durables by borrowing money through credit finance. An increase in the rate of interest…

A

Increases the monthly repayments on these goods, therefore effectively the price of these goods has increased. Households react to this by reducing demand for durables

29
Q

Chain of reasoning: A rise in the rate of interest reduces…

A

The value of stocks, and thus reduces the value of household wealth, leading to a fall in consumption

30
Q

Define Durable Goods

A

Goods that are consumed over a period of time

31
Q

Define Non-Durable Goods

A

Goods that are consumed almost immediately

32
Q

Define Saving

A

The portion of a household’s disposable income that is not spent over a period of time

33
Q

Define Gross Investment

A

The addition to capital stock, both to replace the existing capital stock which has been used up (depreciation) and the creation of additional capital

34
Q

Define Net Investment

A

Gross investment - depreciation

35
Q

Define Depreciation (of capital stock)

A

The value of the capital stock which has been used up or worn out

36
Q

Investment in human capital

A

Investment in the education and training of workers

37
Q

Investment in physical capital

A

Investment in tangible, human-made objects used to produce goods

38
Q

The Accelerator Effect

A

Changes in investment can be directly linked to changes in the rate of GDP growth.

39
Q

How do firms respond to the Accelerator Effect?

A

Firms may respond by using existing capacity more intensively or running down stocks of finished products. If they expect high demand to be sustained, firms may increase investment on capital goods to increase supply capacity (causing a positive accelerator effect - a rise in demand for goods and services will cause a bigger change in demand for capital goods)

40
Q

Investment Equation

A

I(t) = a ( Y (t) - Y (t-1) )
Where:
I (t) = investment in period t
Y (t) - Y (t-1) = change in real income during year t
a = accelerator coefficient (the capital output ratio)

41
Q

Investment leads to an increase in output and growth when…

A

Gross Investment > Depreciation; Net investment is positive therefore productive capacity is increasing

42
Q

What affects government expenditure (G) ?

A

The amount of tax revenue, which itself is affected by: the tax rate, and the tax base

43
Q

Define Tax Base

A

The total value of all of the assets, income, and economic activity that can be taxed by the government; directly proportional to GDP

44
Q

What do governments spend on?

A
  1. Public services
  2. Welfare
  3. State investment
45
Q

What is the difference between current and capital spending?

A

Current spending is the provision of public services e.g salaries of NHS employees. Capital spending is investment in new public infrastructure e.g. new equipment in the NHS

46
Q

Define Expansionary Fiscal Policy

A

Involves increasing spending or cutting taxes to prevent or end a recession or depression - AD increases

47
Q

Define Contractionary Fiscal Policy

A

Involves cutting spending or raising taxes to slow down unsustainable economic growth - AD decreases

48
Q

Define Budget Deficit

A

Occurs when government expenses exceed revenue

49
Q

Define Budget Surplus

A

Occurs when government’s tax revenue exceeds government spending

50
Q

Define National Debt

A

The total amount of money that a country owes to its creditors

51
Q

The UK is in a Budget…

A

Deficit - I > E

52
Q

What affects demand for imports and exports?

A
  1. Protectionism
  2. Tariffs
  3. Labour Costs
  4. (Raw) Material Costs
  5. Non-price factors e.g. expertise, productivity, quality
53
Q

Define Tariffs

A

Taxes on imports which have the effect of raising prices for consumers thus reducing demand

54
Q

Define Protectionism

A

The use of trade barriers to protect domestic economies from foreign competition

55
Q

3 Main side effects of Tariffs

A
  1. Effect of retaliatory tariffs - increasing tariffs leads to a decrease in demand for a good, therefore jobs in export industries will decrease
  2. Increased tariffs leads to an increase in the price of raw materials, therefore prices of goods using those materials increase too
56
Q

Define Quota

A

A physical limit on the quantity of imported goods

57
Q

Impact of exchange rate on trade balance:

A

If UK exchange rate appreciates (increases), imports will be cheaper, therefore consumers will buy more. If it depreciates, demand for exports will increase.

58
Q

Impact of a global recession on trade balance:

A

If there is a global recession, foreigners will have less money to buy exports

59
Q

Impact of Relative Inflation Rate on trade balance:

A

If UK inflation is relatively higher than other countries, UK exports will be more expensive to foreigners and hence they will buy less

Macro Economics (1 decks)

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