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Economics - Macroeconomics > Aggregate Demand And Aggregate Supply > Flashcards

Aggregate Demand And Aggregate Supply Flashcards

1
Q

Aggregate demand

A

Total level of planned real expenditure on the goods and services produced within a country

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2
Q

Aggregate supply

A

The quantity of goods and services that producers in an economy are willing and able to supply at given level of prices

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3
Q

Short-run aggregate supply

A

The relationship between planned national output and the general price level
shows how much output the economy can generate in the short-term at each price level
-rise in GPL should stimulate an expansion of supply
-when prices are falling, production may contract

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4
Q

What affects changes in short-run aggregate supply

A
  • changes in resource prices
  • business taxes, subsidies, regulations and imported costs
  • supply shocks
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5
Q

Equilibrium

A

Where AD equals SRAS

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6
Q

Long-run aggregate supply

A

the ability of an economy to produce goods and services to meet demand is based on the state of production technology and the availibility and quality of factor inputs

The relationship between real GDP and general price level

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7
Q

What effects long-run aggregate supply

A

Anything that increases quantity or quality of the factors of production, e.g. land, labour, capital, enterprise will shift LRAS to the right

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8
Q

Negative output gap

A

Occurs when actual output is less than what an economy could produce at full capacity

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9
Q

Positive output gap

A

Occurs when actual output is more than full capacity output

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10
Q

Components of aggregate demand

A

C+I+G+(X-M)
- C = houshold spending on goods and services
- I = capital investment spending
- G = Government consumption / public services
- X = exports of goods and services
- M = imports of goods and services

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11
Q

Aggregate demand curve

A

A rise in price level causes a contraction of AD
A fall in price level causes an expansion of AD

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12
Q

Wealth effect

A

As price level rises, the real value of income falls and customers are less able to buy what they want or need - this is known as the real balance effect

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13
Q

Balance of trade

A

A persistent rise in the price level of country X could make foreign-produced goods and services cheaper, causing a fall in exports and a rise in importa

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14
Q

Interest rate effect

A

If the price level rises, this cause in inflation and an increase in demand for money and a possible rise in interest rates on loans which then has a deflationary effect on customers and business demand

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15
Q

What causes a fall in aggregate demand

A

Fall in exports
Cut in government spending
Decline in household spending
Higher interest rates

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16
Q

What causes an increase in aggregate demand

A

Depreciation in exchange rate
Cuts in direct/ indirect taxes
Increase in house prices
Expansion of credit and lower rates

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17
Q

Key causes of shifts in aggregate demand

A
  • changes to monetary policy:
    Changes in interest rates/ supply of money and credit/ value of exchange rate
  • changes to government fiscal policy:
    Changes in level of taxes/ spending/ borrowing
  • business and customer confidence:
    Planned capital investment spending by a business/ customer confidence and retail spending
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18
Q

external shocks definition

A

Many unexpected events cause changes to demand, output and unemployment. These events are called external socks

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19
Q

External shocks to aggregate demand

A
  • A large rise in value of the exchange rate
  • A recession, slowdown or boom in one or more of a nations key trading partners
    -a slump in housing market/ construction sector
    -an evet such as the global financial crisis which caused a fall in the supply of credit available to businesses and households
    -a large change in commodity prices for a countrythat is a commodity and exporter
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20
Q

Disposable income

A

income after taxes/ benefits

21
Q

household savings

A

occurs when people decide to postpone their consumption till a future time
saving is a households disposable income that is not spent, i.e. deferred spending

22
Q

ways to save money

A

-accounts in banks
- building society accounts
- savings in pensions/ stock market

23
Q

saving ratio

A

the percentage of disposable income saved rather than spent
A high savings ratio lowers consumption and aggregate demand

24
Q

Base intrest rate

A

set by the bank of england, its the rate of intrest used by commercial banks as a basis for their lending rates

25
Q

FTSE-100 index

A

tracks the share-prices of the 100 largest companies listed on the London Stock Exchange

26
Q

Unemployment

A

Someone who is either out of work and actively lokking for a jobor out of work and waiting to strak a job in the next two weeks

27
Q

Value added tax (VAT)

A

A tax on consumption, whoch is paid to the tax authorities by the seller on behalf of the consumer

28
Q

Macroeconomic importance of saving
Business survival

A

Business survival:
-corporate savings provide a cushion during a recession
-Business savings can be used as finance for takeovers and for capital investment projects

29
Q

Macroeconomic importance of saving
Funding investment

A

Banks need deposits from which they van lend
Savings flow into pension funds - there can be reinvested in stock markets providing investment funds

30
Q

Macroeconomic importance of saving
Buffer for customers

A

Savings can smooth consumption during tough times
They allow people to reduce their debts
Savings are a key source of retirement income

31
Q

Real intrest rate
( factors affecting household savings)

A

= nominal intrest rate adjusted for inflation, a positive real intrest rate incentives saving
affects household saving

32
Q

Price Expectations
( factors affecting household savings)

A

If consumers expect prices to fall, i.e. deflation, they may choose to save more now

33
Q

Unemployment/job secuirity
( factors affecting household savings)

A

when unemployment is rising, many people save as a precaution
household savings increase

34
Q

Availibility of credit
( factors affecting household savings)

A

Consumer borrowing counts of dis-saving ( spending > current income

35
Q

Credit

A

when banks make a loan it creates credit. The loan results in the creation of an advance, which is an asset on the banks balance sheet, and a deposit, which is a liability to the bank

36
Q

Consumer confidence/ expectations/ uncertainty
( factors affecting household savings)

A

When consumer confidence is strong, people are more will to borrow and save less

37
Q

Taxation of savings
( factors affecting household savings)

A

Interest on many types of savings is taxed, some saving schemes are tax-free or low-tax

38
Q

Trust in saving institutions
( factors affecting household savings)

A

Deposit guarantees can encourage a higher level of household saving in banks

39
Q

Need to pay back debt
( factors affecting household savings)

A

Short-term saving to repay credit card bills or save for a mortgage deposit

40
Q

Ntional income multiplier effect

A

The effect on national income and product of an exogenous increase of demnad

41
Q

Gross investment

A

the total investment on new capital inputs
the total amount that the economy spends on new capital

42
Q

net investment

A

= gross investment adjusted for capital consumption
some new investment needed each year to replace worn out machinery
if gross investment in a given year is higher than capital consumption, then net investment will be positive and the economies capital stock will grow

43
Q

Key factor determining business investment

A

-Actual and expected demand
- Expected profits and business taxes
- intrest rates and availibility of business finance
- Business confidence i.e. animal spirits

44
Q

Implications of a rise in business investment

A

A higher level of investment can raise both actaul and potencial GDP growrh and help to control inflationary pressures

45
Q

short-run aggregate supply curve

A

The SRAS curve is upward sloping as higher prices for goods and services make output more profitable and enable businesses to expand production by hiring extra labour and other resource
rise in price = expansion of AS
fall in price = contraction of AS
main factor causing a shift in SRAS is the resource cost of producing goods and services, e.g. wage unit costs

46
Q

shifts in SRAS
- changes in resource prices

A

-wage cost per unit of output
- labour productivity, higher efficiency lowers unit cost
-Raw materials and component prices such as glass, cement and rubber
-energy costs such as the world price of oil, gas and electricity

47
Q

shifts in SRAS
- Business taxes, subsidies, regulations and imported costs

A
  • VAT, environmental changes/ employment taxes
    -changes in the scale and size of gov subsidies to ceratin industries
    -Business rates and costs of meeting business regulations and other laws
    -costs of imported component
48
Q

shifts in SRAS
-Supply shocks

A

e.g. a hurricane or tsunami or the effects of drought, flooding or a political crisis/ civil war which can have an effect on a countries national output

49
Q

outward shift of LRAS
yp?

A

An outward shift of LRAS shows a rise in productive potencial
yp = the estimated national output in the long run

Economics - Macroeconomics (5 decks)

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