aggregate demand Flashcards

1
Q

graph of AD

A

downwards sloping demand curve

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2
Q

ad equation meaning

A

aggregate demand = consumption + investment+ government spending + (export - imports)

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3
Q

why does the AD curve slope down

A
  • PL rising - interest rate usually rises as well - to maintain real rate of interest which otherwise would be distorted by inflation
  • higher wages demanded by labour force - real wages fall as PL increases cet par = less purchasing power
  • as PL higher, price of exports increases - less people likely to buy X - AD falls
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4
Q

what shifts AD?

A

changes in injections (I, X, G) or leakages (T, M, S)

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5
Q

YPD meaning

A

YPD - personal disposable income: gross income - direct tax = net income
net income - indirect tax = personal disposable income
= consumption + savings

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6
Q

keynesian consumption function

A

keynes argued that consumption is a function of personal disposable income
c=f(Ypd)
graph showing c=Ypd upwards sloping 45 degrees to Ypd (x axis) and C(y axis)
extra line y=a+bYpd
a = necessities
b = gradient

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7
Q

gradient of keynesian consumption function

A

b = marginal propensity to consume - constant according to keynes

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8
Q

marginal propensity to save - MPS

A

percentage likely for comsumers to spend vs save
mpc + mps = 1
calculated by change in saving/ change in income

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8
Q

marginal propensity to consume - MPC

A

percentage likely for comsumers to spend vs save
shown by gradient on y = a + bYpd

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9
Q

APS and APC

A

average propensity to save and average propensity to spend
apc + aps = 1

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10
Q

difference between marginal and average propensities

A

marginal - needs 2 numbers to measure a change
average - any point in time, one number needed, just total x/total y

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11
Q

low income apc/aps

A

low income people - do not have enough to fund necessities (a) so aps is negative and apc is over 1
called ‘dissaving’

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12
Q

high income apc/aps

A

apc significanly below 1 for high income earners (apc>mpc) so they are more likley to save

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13
Q

recent UK trends in consumption

A
  • Covid - fall in consumption but compensated after covid by all the savings in covid, traveling
  • as inflation rose, consumption fell as real incomes fell
  • rising interest rates meant cost of money riased so people with loans lower Ypd so lower C
  • high UE levels - lower C
  • falling house prices - negative wealth effect - less consumption because less confidence
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14
Q

why do people save

A
  • uncertainty - short tern uncertainty funds as precaution
  • smooth consumption - save for the future and retirement to be able to keep consuming and maintianing lifestyle
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15
Q

factors influencing saving ratio

A
  • wealth - higher wealth effect, less likley to save (example - houses, shares)
  • interest rates - higher rates, higher reward for saving so more saving
  • demographic - middle aged people likely to save more
  • inflation - less likely to save if rising inflation - have lower real income
  • culture - some cultures have different propensity to save
  • uncertainty - expectations on economic outlook
  • constraints - if they have to spend on something
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16
Q

what cultures have highest and lowest propensities to save?

A

highest - greece, lithuania
lowest - netherlands, portugal

17
Q

investment definition

A

spending by firms on capital goods

18
Q

what are capital goods

A

anything that can be used more than once and is manufactured

19
Q

business performance relationship to investment

A

business performance in the future is a function of the investment done today

20
Q

UK investment

A

too low compared to other developed countries

21
Q

capital consumption

A

money spent to replace capital

22
Q

Gross investment equations

A

Gross I = Net investment + capital consumption = total spending on I
Gross I = GDFCF (gross domestic fixed capital formation)

23
Q

Net investment

A

money spent on new capital

24
revenue costs
gross profit - corporation tax = net profit net profit = dividends + retained profit retained profit is what goes into investment
25
why do firms invest
- decreasing average CoP - so they can lower prices and increase competition - increase output - increasing market share and pricing power - all lead to higher profit (neoclassical ec. theory: firms aim to maximise profit)
26
what affects if a firm invests
- profit - confidence/expectations - type of firm - labour v capital - interest rates if loans needed - competition - access to finance
27
MEC in investment and graph
MEC = marginal efficiency of capital graph is downwards sloping straight line - r = interest rates = y, quantity = x as interest rates increase, costs of borrowing are hgher so quantity falls
28
what are MEC curves affected by
expectations / expectations of profitability of revenue function
29
what is debt interest
money paid back by the government to people who are owed money
30
what % of GDP in Uk is GS?
45%
31
% of UK GDP consumtpion
62%
32
what is a budget deficit
when GS>TR
33
what determines government spending
- revenue / budget - market failure that needs intervention - quality of public services - state of the economy - inflation - demographic - government debt and interest on spending - external crises - political decisions - bond - interest rates - wages - people employed by governmentq
34
3 parts of GDP
capital spending - government investment current spending - day to day spending transfer payments - payments not going to get back such as welfare benefits
35
UK exports and imports
UK is net importer X
36
determinants of quantity of X and M
- exchange rate - relative prices - quality of goods - protectionism - interest rates - incomes - location
37
multiplier formula
K (multiplier) = 1/leakages =1/mpw = 1/(mpt+mps+mpm) UK economists think it is between 1 and 2
38
most efficient injection
investment spending
39
LRAS shift with multitplier
will only shift when effects of injections happen