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A-level Economics- Theme 2 > Aggregate Demand > Flashcards

Aggregate Demand Flashcards

1
Q

What is AD?

A

Aggregate Demand- total planned expenditure of 🚘/🧹 produced in a country

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2
Q

What is the AD formula?

A

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

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3
Q

How does AD respond to a change in price?

A

When price ⬇️, AD expands along AD curve

When price ⬆️, AD contracts along AD curve

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4
Q

Why is the AD curve downward sloping?

A

1) At ⬆️ price levels, interest rates ⬆️ to ⬇️ demand (as initial ⬆️ price caused by inflation from ⬆️ demand)-> ⬇️ in investment as loans ⬆️ expansive & … AD ⬇️
2) ⬇️ domestic prices = ⬆️ international competition … ⬆️ exports & ⬇️ imports … net exports ⬆️ … AD ⬆️

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5
Q

What are the components of the AD formula?

A 
C- consumption
I- investment 
G- government spending 
X- exports
M- imports
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7
Q

What is consumption?

A

Spending by 🏠holds on 🚘/🧹

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8
Q

How much does consumption make up of AD?

A

Main component of AD (60%)

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9
Q

What is investment?

A

Increase in capital stock (machines etc)-> ⬆️ 💵 in the future

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10
Q

How much does investment make up of AD?

A

Makes up 10-15% of AD (dependent on whether gross or net investment being considered)

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11
Q

What is unique about the relationship between AD and investment?

A

Investment effects AD AND AD effects investment

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12
Q

What is gross investment?

A

Gross investment- total investment before depreciation of capital assets considered (capital ⬇️ value as it wears out or becomes ⬇️ efficient- some made totally redundant when new production methods introduced)

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13
Q

What is net investment?

A

Net investment- takes into account the ⬇️ of capital assets

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14
Q

When is net investment more useful?

A

⬆️ useful when looking at productivity of economy & production potential

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15
Q

Which factors affect spending/consumption?

A
  1. ⬆️ income after tax = ⬆️ disposable income-> ⬆️ spending & ⬆️ saving
  2. Consumer confidence in job security & future income 💵 prospects
  3. Interest rates
  4. Housing market- ⬆️ 🏠 prices-> ⬆️ equity available to be extracted from 🏠 (wealth effect)
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16
Q

Which factors affect investment?

A

1) Economic growth- ⬆️ confidence in future sales
2) Business expectations- ⬆️ confidence in future sales
3) What main competitors are doing
4) Government incentives & regulations
5) Interest rates- ⬆️ interest rates = ⬆️ cost of borrowing
6) Demand for exports- ⬇️ exchange rate = ⬆️ demand for exports-> ⬆️ investment
7) Access to credit- how keen banks are to lend 💵- conditions applied to loans etc

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17
Q

What are animal spirits?

A

Animal spirits- forces that make markets move in large booms or busts cause irrational humans buy & sell impulsively rather than rationally to avoid losses & make profit

18
Q

Who came up with animal spirits?

A

Keynes

19
Q

What do animal spirits cause people to do and what are the consequences of these actions?

A

Animal spirits-> buy when prices ⬆️ (make profit) & sell when prices ⬇️ (avoid loss)
Explains volatility in asset prices- speculative buying exaggerates trends in business 🚲

20
Q

What is government expenditure?

A

All spending in economy

21
Q

How much does government expenditure make up of AD?

A

Makes up 25% of AD

22
Q

What is a budget/fiscal deficit?

A

Budget/Fiscal deficit- ⬆️ spending than tax revenue- dome during recession/slow down to ⬆️ AD

23
Q

What is a budget/fiscal surplus?

A

Budget/Deficit surplus- ⬇️ spending than tax revenue- done during boom to ⬇️ AD (prevent ⬆️ inflation)

24
Q

Which factors affect government expenditure?

A

1) Trade cycle 🚲 (pattern of economic growth- changes from booms to recessions etc)- in a boom there is ⬆️ economic growth & … G ⬇️ as ⬇️ demand for Jobseeker’s allowance & other benefits etc
2) National debt (accumulation of budget deficits over the years)- interest payments need to payed on debt & … ⬆️ spending-> cost for further generations

25
Q

What is the Keynesian view on expansionary fiscal policy?

A

Keynes- fiscal policy powerful tool to shift AD

26
Q

What is the classical view on expansionary fiscal policy?

A

Classical- overspending has same effect as printing ⬆️ 💵 = purely inflationary

27
Q

What is net trade/net exports (X-M)?

A

Exports- injection into circular flow of income (💵 inflows into domestic flow of income)
MINUS —
Imports- withdrawal (outflow of 💵)

28
Q

Which factors affect net trade?

A

1) Level of real income- ability for consumers both domestically (imports) & foreign (exports) to buy 🚘/🧹
2) Exchange rate- ⬆️-> imports cheaper & exports expensive-> ⬆️ imports & ⬇️ exports … strong 💴 worsens net exports- vice versa for ⬇️ BUT dependent on demand elasticity- if inelastic e.g. for⛽️ then exchange rate ✖️ affect net trade
3) Global economy- recession in 1 country means it buys ⬇️ 🚘 from another & export ⬆️- ALSO inflation in 1 country makes its 🚘 ⬇️ competitive as ⬆️ expensive
4) Protectionism- trade restrictions placed of foreign firms

A-level Economics- Theme 2 (15 decks)

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