Aggregate Demand & Aggregate Supply

Question 1

What are included in the physical flow in the circular flow of income?

Answer 1

goods, services, land, labour, capital

Question 2

What are included in the monetary flow in the circular flow of income?

Answer 2

expenditure, income

Question 3

What are the injections in the circular flow of income?

Answer 3

exports
investment
government spending

Question 4

What are the leakages in the circular flow of income?

Answer 4

imports
savings
taxes

Question 5

What is the multiplier effect?

Answer 5

an initial injection into an economy has a much greater actual change in the national income

Question 6

What is the difference between wealth and income?

Answer 6

wealth - the total value of all one’s assets

income - the flow of money e.g. salary

Question 7

What are the components of Aggregate Demand (AD)?

Answer 7

Consumption
Investment
Government spending
Net exports (Exports - Imports)

Question 8

What factors affect consumption and saving?

Answer 8

Income
interest rates
consumer confidence
wealth effects
taxes
unemployment

Question 9

How are saving and investment different?

Answer 9

savings are made by households

investment is firms’ expenditure

Question 10

What factors affect investment?

Answer 10

Risk
Government incentives and regulation
Interest rates and access to credit
Technical advances
Business confidence and 'animal spirits'

Question 11

What is included in ‘government spending’?

Answer 11

money spent on public goods and services

it doesn’t include spending on things which don’t directly contribute to output, e.g. pensions and benefits

Question 12

What does a government budget deficit indicate?

Answer 12

spending is greater than revenue

Question 13

What factors affect imports and exports?

Answer 13

exchange rates
changes in the state of the world economy
degree of protectionism
non-price factors e.g. quality

Question 14

What does the overall size of the multiplier depend on?

Answer 14

the size of the leakages from the circular flow of income

Question 15

What does the aggregate demand curve show?

Answer 15

how a change in price level will affect the amount of output that is demanded

Question 16

What is the average propensity to consume?

Answer 16

the proportion of national income thats spent

Question 17

what is the marginal propensity to save?

Answer 17

the proportion of any extra income that’s saved

Question 18

How do you calculate the multiplier?

Answer 18

1/(1 - marginal propensity to consume (MPC))

Question 19

Why is the LRAS curve vertical?

Answer 19

Because the economy is operating at full capacity so a change in price won’t affect real national output

Question 20

Which type of LRAS curve is horizontal then vertical?

Answer 20

Keynesian

Question 21

What causes the SRAS curve to shift?

Answer 21

changes in costs of production

Question 22

Whats causes the LRAS curve to shift?

Answer 22

changes in factors of production, i.e. anything that affects the capacity of the economy

Question 23

Examples of things that might shift the AS curve to the right are…

Answer 23

technological advancements
more efficient production
improved education and skills
changes in government regulations
improved healthcare
increasing factor mobility
promoting enterprise
supply of new resources 
improvements in banking system

Question 24

What is the accelerator effect?

Answer 24

when national income is growing rapidly, firms will invest heavily to increase output

Question 25

Which two effects can work together?

Answer 25

multiplier and accelerator

Question 26

An increase in AD does what?

Answer 26

increases output, but only in the short run

Question 27

To achieve all four macroeconomic indicators, what two things need to occur at the same time?

Answer 27

an increase in both AD and LRAS

Question 28

What will maximise the effect of the multiplier?

Answer 28

elastic AS, as there is lots of spare capacity, so there can be a large rise in output

Question 29

If AS increases, what happens to the macroeconomic indicators?

Answer 29

they all improve:
increased output = economic growth
more jobs = lower unemployment
price level will fall = lower inflation
more competitive economy = improve the balance of payments

Question 30

How does Keynesian AS curve affect the effects of any shifts?

Answer 30

the curve is L shaped so price level or output will change differently