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Economics AS (Macroeconomics) > Aggregate Demand > Flashcards

Aggregate Demand Flashcards

1
Q

Define Aggregate Demand?

A

The total demand for goods and services in an economy at a given price level in a given time period.

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2
Q

What four components is Aggregate Demand divided into?

A
  • Consumption
  • Investment
  • Government spending
  • Foreign Purchases
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3
Q

What comes under consumption?

A

Household spending

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4
Q

What comes under investment?

A

Spending by firms

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5
Q

What isn’t included in government spending in AD?

A

It does not include transfer payments like benefits.

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6
Q

What comes under and what doesn’t come under foreign purchases in AD?

A
  • Foreign purchases includes exports

- Foreign purchases does not include imports because imports are not made by the economy.

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7
Q

What is the formula for AD?

A

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

AD= consumption+investment+government spending+(exports-imports

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8
Q

What goes on the X axis on the AD curve?

A

Real GDP

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9
Q

What goes on the Y axis on the AD curve?

A

Price Level

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10
Q

If the price level is high…

A

The national output is low

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11
Q

If the price level is low…

A

The national output is high

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12
Q

What’s the largest component of AD?

A

Consumption

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13
Q

What are the 8 determinants of consumption?

A

1) Income
2) Wealth
3) Rate of Interest
4) Tax
5) Availability of credit
6) Expectations
7) Age Distribution
8) Inflation

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14
Q

What impact should an increase in Income have on consumption?

A

An increase in income should lead to more consumption.

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15
Q

What is Marginal Propensity to Consume (MPC)?

A

The percentage of extra income spent.

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16
Q

What is the formula for MPC?

A

MPC= change in consumption/change in income

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17
Q

What is the difference between wealth and income?

A

Wealth is a stock, income is a flow.

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18
Q

What makes up wealth?

A

money+assets (that have a realistic monetary value)

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19
Q

What is the wealth effect?

A

Where a rising asset value leads to increased confidence to spend, even though they don’t have any more money.

20
Q

What form of inflation to governments generally think is good to do with the wealth effect, and why?

A

Governments believe that rising house prices are the only good form of inflation because it encourages consumption.

21
Q

What effect does the interest rate to do with savings have on consumption?

A

The interest rate changes the opportunity cost of inflation. If there is a high interest rate then saving may seem like a better option than consuming.

22
Q

What is the opportunity cost of consumption?

A

Saving

23
Q

What effect does the interest rate to do with borrowing have on consumption?

A
  • The interest rate affects the decision and the ability to borrow. A low interest rate may persuade more people to borrow, which would boost consumption.
  • Also if a person has a variable rate mortgagee then that changes a persons disposable income, however fixed rate mortgages will not.
24
Q

What is an example of a direct tax?

A

Income tax

25
Q

What is an example of an indirect tax?

A

VAT

26
Q

What’s the relationship between change in tax and consumption?

A

-Decrease tax, increase consumption.

27
Q

What effect does availability of credit have on consumption?

A

If credit is more available then people are more likely to borrow and therefore spend.

28
Q

What effect do economic expectations have on consumption?

A

-People speculate into the future conditions of an economy. If the condition of the economy looks good then they will be more likely to spend.

29
Q

What effect does age distribution have on consumption?

A

Different age groups have different spending patterns.

30
Q

What negative effect does inflation have on consumption?

A

If prices increase then people will spend less.

31
Q

What positive effect could inflation have on consumption?

A

Potentially people speculate about further increases in price in the future so they spend more now.

32
Q

Define investment?

A

Spending by firms on capital goods

33
Q

What are the three determinants of investment?

A
  • Expected future demand
  • Price of capital goods
  • Advances in technology
34
Q

What is the impact of the interest rate on investment?

A
  • Much of investment spending is financed by borrowing.Therefore the cost of borrowing is an important factor in an investment decision.
  • A high rate of interest may make an investment project unattractive in terms of its cost.
  • A firm hopes to make a profit from an investment, but if the interest rate is high then the overall cost of the investment may be too high for it to make a profit.
  • Even if a firm finances investment from its own funds, the interest rate is still relevant. A high rate may make saving the money more attractive.
35
Q

Why may a government want to encourage investment?

A
  • It keeps the economy active (more AD)

- It helps to sell exports.

36
Q

What can a government do to encourage investment?

A
  • Lower the rate of corporation tax

- Provide investment subsidies.

37
Q

What effect would lowering the rate of corporation tax have on investment?

A

Lowering the rate of corporation tax would lower the cost of investment to a firm, thus increasing investment.

38
Q

What effect would providing investment subsidies have on investment?

A

Investment subsidies would encourage investment by firms because it would lower the cost of investment for a firm.

39
Q

What is the impact of business expectations on investment?

A

Firms may undertake investment to expand capacity if encouraged by optimistic forecasts of future growth and demand for their products. The amount of expected profit will be a key determinant.

40
Q

What is the impact of changes in technology on investment?

A

New products create new sales opportunities, thus increase in investment.

41
Q

What are the two categories of government spending?

A
  • Capital spending

- Current spending.

42
Q

What are some examples of government capital spending?

A
  • HS2
  • Armed forces weapons
  • hospital equipment
43
Q

What are some examples of government current spending?

A
  • upkeep of parks
  • -running a state broadcaster
  • -electricity bills for government buildings.
44
Q

Determinants of government spending?

A
  • Position in the electoral system
  • Position in the economic cycle
  • Ideology
  • Government income/cost of borrowing
45
Q

What impact does the business cycle have on government spending?

A

It has an important impact on the level of government income transfers. Movement into recession will increase social security payouts

46
Q

What are the determinants of export spending?

A
  • The business cycles

- Trade competitiveness.

47
Q

What factors determine trade competitiveness?

A
  • Comparative productivity
  • The determinants of higher productivity
  • Exchange rates

Economics AS (Macroeconomics) (13 decks)

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