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Economics > Aggregate Demand + Aggregate Supply > Flashcards

Aggregate Demand + Aggregate Supply Flashcards

1
Q

What is the AD formula

A

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

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2
Q

What doesn’t government spending include

A

Transfers of money

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3
Q

What is government spending component of aggregate demand

A

Money spent by government on goods on public goods + services

Only money that directly contributes to output of the economy is included

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4
Q

Define government budget

A

Outlines a government’s planned spending + revenue for the next year

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5
Q

What is a budget deficit

A

If government spending is greater than its revenue

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6
Q

Define budget surplus

A

If government spending ie less than its revenue

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7
Q

Why do governments use fiscal policy

A

To alter their spending + taxation influence

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8
Q

If AD is low and economic growth is slow/negative then what will the government do

A

Government may overspend (causing a budget deficit) in order to increase AD and boost economic growth

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9
Q

What will a government do if AD is high and the economy is experiencing a boom

A

Government may increase taxes and spend less (causing budget surplus) to try and reduce AD and slow down economic growth

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10
Q

What will an imbalance in the budget affect

A

The circular flow of income

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11
Q

What will a budget surplus indicate

A

Overall withdrawal from the circular flow

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12
Q

What does a budget deficit indicate

A

Overall injection into the circular flow

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13
Q

Imbalance in the budget is fine in the short run, but in the long run..

A

Governemtns will try to balance out any surpluses or deficits

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14
Q

What does a long term surplus mean

A

Government is harming economic growth by choosing not to spend, or by keeping taxes too high

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15
Q

What does a long term deficit indicate

A

Country has a large national debt

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16
Q

Define exports

A

Goods or services that are produced in one country, then sold in another

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17
Q

Define imports

A

Goods + services that are brought into a country after being produced elsewhere

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18
Q

What do exports do to the circular flow of income

A

Injects money into the circular flow of income

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19
Q

What is net exports

A

(X - M)

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20
Q

What are the factors that will affect imports and exports

A

The exchange rate
LR - value for currency increases, imports become cheaper + exports become more expensive for foreigners. Therfore demand for imports increases + demand for exports falls

Changes in the state of the world economy
Higher real income in country -> more it imports
Therefore net exports fall as income rises

Degree of protectionism
In SR - tariffs + quotas increase net exports by reducing imports
Industries that are protected from international competition have few incentives to become more efficient, exporting less in LR

Non price factors
Quality of goods
People are willing to pay more for something if it is really good -> improvement in net exports

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21
Q

What will be on the x and y axis of the AD curve

A

Price level on y axis

Real national output on x axis

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22
Q

A rise in price level will cause output to fall because

A

Things become more expensive, people can purchase fewer goods + services

Demand for exports reduced - domestically produced produced become less competitive

Demand for imports will increase if their prices haven’t risen, making them cheaper

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23
Q

Why will the AD curve shift to the right

A

Rise in consumption, investment, government spending or net exports that hasn’t been caused by a change in the price level

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24
Q

What does an increase in AD mean for Labour

A

Labour is a derived demand

Increse in AD means output increases, increasing demand for Labour -> creating more jobs.-> increase in employment levels

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25
Q

Why might the AD curve shift to the left

A

Fall in consumption, investment, government spending or next exports that hasn’t hasn’t caused by a change in the price level

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26
Q

What does the multiplier effect lead to

A

A larger increase in aggregate demand

E.g. gov injectes money into health care, money may be used for wages, money then spent by consumers, increasing consumption, creating a second increase in AD (continues till all the money has leaked out)

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27
Q

What does the size of the multiplier depend on

A

The size of the leakages

28
Q

An initial injection of £50m is estimated to cause a total change in national income of £75m. Find the size of the multiplier

A

Multiplier = change in national income/ initial injection

75 / 50 = 1.5

29
Q

What is the multiplier effect

A

When an injection is made into the circular flow, the actual change in the national income is greater than the initial injection

29
Q

What is the multiplier effect

A

When an injection is made into the circular flow, the actual change in the national income is greater than the initial injection

30
Q

What are the two types of AS curve

A

SRAS curve

LRAS curve

31
Q

What are the properties of an SRAS curve

A

Slope up from left to right

32
Q

Draw an SRAS curve

A

…

33
Q

Properties of an LRAS curve

A

Assumed in long run economy will move towards equilibrium where all resources are being used to full capacity. So the economy is running at its full productive potential

LRAS curve is vertical.

Increase in price level won’t cause an increase in output as economy is running at full capacity, so can’t create any more output

34
Q

What causes the SRAS curve to shift

A

Change in the costs of production

35
Q

What causes the LRAS curve to shift

A

Changes in factors of production

Changes in factors of production which affect the capacity of the economy

E.g. investment that leads to advances in technology + more efficient production

Improvement in education + skills - more productive workers -> max output increased

Demographic changes- skilled workers migrating to a country change economy capacity

36
Q

A rise in demand might cause an …… increase in investment

A

Accelerated

Firms will make accelerated investment in capital goods, expecting to increase output and make profit in future

Likely to occur when economy is going through a recovery, or at the start of a boom (these are times where demand will be rapidly increasing and firms will need to invest to meet this demand)

If national income is growing rapidly, businesses will invest heavily

37
Q

How does the multiplier and accelerator work together

A

During a recovery, AD will be growing
Firms increase their level of investment -> leads to another increase in AD -> then multiplied making the growth in national income more rapid -> more accelerated investment

38
Q

Where does macroeconomic equilibrium occur

A

When AS = AD

39
Q

Increase in AD alone can increase output in the

A

Short run

40
Q

Draw an SRAS curve with an AD curve

A

…

41
Q

Draw an LRAS curve

A

….

42
Q

Look at multipler

A

..

43
Q

What will a shift to the right of an SRAS curve cause

A

Increase in capacity of economy

Increase in output -> increased economic growth-> more jobs reducing unemployment -> price level tends to fall and the economy will become more competitive internationally, improving the balance of payments

44
Q

What would a decrease in AS cause

A

Worsen the state of all four macroeconomic indicators

45
Q

If LRAS shifts right

A

Output is increased, price level falls, balance of payments will potentially improve and the economy remains at full employment

45
Q

If LRAS shifts right

A

Output is increased, price level falls, balance of payments will potentially improve and the economy remains at full employment

46
Q

What is the economy made up of

A

Firms + households

47
Q

What is national income

A

Money paid by firms for these factors of production to households

48
Q

Draw the circular flow of income

A

…

49
Q

What are the two flows in the circular flow of income

A

Physical flow (real things) - straight arrows

Monetary flow (curved arrows) - money that pays for physical things

50
Q

What are injections

A

Exports, investment, gov spending

To firms

51
Q

What are withdrawals

A

Imports, savings, taxes

To households or firms

52
Q

What does it mean if injections = withdrawals

A

Economy in equilibrium

53
Q

What does it mean if injections into the circular flow of income is greater than withdrawals

A

Expenditure greater than output

54
Q

If withdrawals are greater than injection

A

Output is greater than expenditure

55
Q

What does the size of the multiplier depend on

A

The size of the leak

56
Q

Define wealth

A

Total value of the assets owned by individuals

Stock concept -> pile of resources not being used by the circular flow of income -> could be at some point

57
Q

What are assets

A

Money, physical items

58
Q

What is aggregate demand

A

Total demand or spending over a period of time in an economy

59
Q

What are the factors that affect investment

A

Risk

Gov incentives + regulation

Interest rates + access to credit

Technical advice

Business confidence + animal spirits

60
Q

What doesn’t government spending include

A

Transfers of money

61
Q

What does it mean if there is a budget deficit

A

Government spending more than the revenue they are receiving

62
Q

What is a budget surplus

A

Government spending less than they are receiving from revenue

63
Q

What is a surplus

A

More of an item than needed

64
Q

What are commodities

A

raw materials that are used in the production of goods and services

Economics (38 decks)

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