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Economics > Aggregate Demand > Flashcards

Aggregate Demand Flashcards

1
Q

What is Aggregate Demand (AD)?

A

The total planned expenditure in an economy

AD is calculated using the formula: AD = C + I + G + (X - M), where C = consumption, I = investment, G = government spending, X = exports, and M = imports.

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2
Q

What does the AD curve represent?

A

The relationship between the price level and the quantity of goods and services demanded

The AD curve slopes downwards to the right.

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3
Q

What is the wealth effect?

A

When prices fall, consumers feel better off as their income can buy more

This effect contributes to movements along the AD curve.

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4
Q

What are the main determinants of Aggregate Demand?

A
  • Consumption
  • Investment
  • Government Spending
  • Exports - Imports

Each of these factors can shift the AD curve.

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5
Q

What happens to exports when the price level drops?

A

Net exports increase, leading to an increase in aggregate demand

This occurs due to lower interest rates and a depreciating real exchange rate.

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6
Q

How does the interest rate affect Aggregate Demand?

A

Lower interest rates usually lead to higher aggregate demand

This is because lower rates encourage borrowing and spending.

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7
Q

Fill in the blank: The formula for Aggregate Demand is AD = _______

A

C + I + G + (X - M)

C = consumption, I = investment, G = government spending, X = exports, M = imports.

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8
Q

True or False: Government spending is affected by the price level.

A

False

Government spending remains constant regardless of price level changes.

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9
Q

What percentage of GDP is accounted for by personal consumption?

A

60%

Personal consumption is a major component of aggregate demand.

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10
Q

What is the impact of the savings ratio on Aggregate Demand?

A

A higher savings ratio typically leads to lower aggregate demand

This is because less disposable income is available for consumption.

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11
Q

What is the shape of the AD curve?

A

Downwards to the right

This indicates an inverse relationship between price level and quantity demanded.

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12
Q

What is consumption?

A

The spending by households on goods and services

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13
Q

What % of GDP does consumption account for?

A

60%

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14
Q

What factors will change the level of consumption?

A

Level of income, employment, consumer confidence, future price changes, job security.

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15
Q

What does the personal savings ratio measure?

A

The actual or realised saving of the personal sector as a ratio of total personal sector disposable income.

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16
Q

What is the personal saving ratio equation?

A

Realised or actual personal saving / personal disposable income

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17
Q

What does the household savings ratio measure?

A

The households realised saving as a ratio of their disposable income.

18
Q

What is investment?

A

The spending on machinery (capital) , buildings and improving the skills of the workforce (human capital)

19
Q

What factors affect investment?

A

Borrowing costs, business confidence, productivity of capital, changes in demand, stock market, employment levels.

20
Q

What is government spending?

A

Mainly spending by the government on public and merit goods.

*gov spending has fallen over past 50 years

21
Q

Examples of privatised businesses.

A

-British steel
-British telecom
-British gas

22
Q

What do the government spend money on?

A

-Health
-Education
-Defence
-Social security
-Transport

23
Q

What is Net exports?

A

Exports minus imports

24
Q

What is the effect on AD if other economies are in a recession?

A

They won’t be able to afford the goods/services we produce and therefore AD would shift to the left. AD decreases.

25
Q

What factors affect the demand for imports and exports?

A

Exchange rates, Inflation, trade policies, economic states of other economies.

26
Q

What is the savings ratio?

A

The % of the disposable income that is saved rather then spent. Higher the savings ratio the lower consumption will be and the Therefore investment.

27
Q

How does the real interest rate affect the savings ratio?

A

This is the nominal interest rate adjusted for inflation, a positive real interest rate makes saving attractive.

28
Q

How does price expectations affect the savings ratio?

A

Positive expectations would tend to reduce savings and increase spending.
If people think the prices falling they save now.

29
Q

How does unemployment affect the savings ratio?

A

High unemployment might induce people to save more and hence consume less.

30
Q

How does consumer confidence affect the savings ratio?

A

Less prone to save if there is high confidence. Low confidence means higher savings ratio.

31
Q

How does consumer confidence affect the savings ratio?

A

Less prone to save if there is high confidence. Low confidence means higher savings ratio.

32
Q

How does tax on savings affect the savings ratio?

A

Higher tax on savings means lower savings ratio as saving is more expensive. So less people save.

33
Q

Why is saving important?

A

-Saving facilitates lending
-Helps people achieve financial security
-Allows for future financial goals e.g buying a house
-Backup in a recession
-Bank liquidity
-Capital investment funding
-Key source of retirement income

34
Q

What is the marginal propensity to consume (MPC)?

A

Proportion of Income that you spend.

35
Q

What is replacement investment?

A

Maintains size of existing capital stock by replacing worn out machinery.

36
Q

What is net investment?

A

Adds to capital stock therefore increases productive potential.

37
Q

What is the accelerator effect?

A

When an increase in national income results in a proportionately larger rise in investment.

38
Q

What is the Demand for capital goods being driven by?

A

The demand for the products that the firm is supplying to the market. This gives rise to the accelerator effect.

39
Q

What is a budget deficit?

A

When government spending exceeds tax revenue

40
Q

What is a budget deficit?

A

When government spending exceeds tax revenue

41
Q

What is a budget surplus?

A

When tax revenue exceeds government spending.

Economics (1 decks)

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