Aggregate Demand And Aggregate Supply

Question 1

What are the injections and withdrawals from the flow of income?

Answer 1

Injections from circular flow of income come from exports, investments and government spending
Withdrawals come form imports savings and taxes

Question 2

Why do injections have a multiplier effect?

Answer 2

Because when an injection is made into the circular flow of income the actual change in the national income is much greater than the initial injection.
The size of the multiplier effect depends on the rate at which money leaks from the circular flow so the bigger the leakages the quicker the money will leave the circular flow and the smaller multiplier effect will be

Question 3

What does aggregate demand mean ?

Answer 3

It’s the total demand or total spending in an economy over a period of given time

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

Question 4

What is consumption?

Answer 4

The total amount spend by households on goods and services. It’s the largest component of ad in the UK it makes up about 65%

Question 5

What are the main factors affection consumption and saving? (6)

Answer 5

1) income -as income rise so does consumption. The rate at which consumption rises is less than income because households tend to save some of their income.
2) interest rates- higher interest rates lead to less consumer spending. They save more as they take an advantages of the high rewards
3) consumer confidence - when they feel more confident about the economy they’ll spend more rather than save
4) wealth - a rise in household wealth will lead to a rise in consumer spending and a decrease in saving
5) taxes- direct taxes lead to a fall in in consumers disposable income meaning that they spend less and vice versa
6) unemployment- when unemployment rises consumers tend to spend less and save more

Question 6

Factors that effect investment? (5)

Answer 6

1) the level of risk involved will affect the amount that firms invest.
2) business confidence- the more it’s confident in its ability to make profit the more it will invest.
3) government incentives and regulations- a relaxation of government regulations will reduce firms cost and therefore make it easier to invest.
4) interest rates- when interest rates are high investment tends to be low because firms often borrow the money they won’t to invest so if the investment is not profitable then they won’t invest.
5) technical advances - investment will rise when significant technological advances are made

Question 7

What does government spending include?

Answer 7

Money spent on public goods such as education healthcare defence and so on. It does not include transfers of money such as benefits and pensions

Question 8

How do imbalances in the budget affect the circular flow of income?

Answer 8

A budget surplus will indicate an overall withdrawal

A budget deficit will indicate an overall injection

Question 9

Factors that affect imports and exports? (3)

Answer 9

1) exchange rate
- long run~ if the value of money increases then imports become
Cheaper. Demand for imports rises and exports falls
- short run~ demand for imports and exports tends to be inelastic so
In short run the demand stays the same
2) changes in the state of the world economy
3) non-price factors- eg quality of goods. If a product increases in quality it will be exported more using by any price as consumers are willing to pay for the good

Question 10

Why will a rise in the price level cause output to fall? (3)

Answer 10

1) domestic consumption will be reduced- things become more expensive so people can purchase fewer goods and services
2) demand for exports will be reduced- domestically produced products will become less competitive
3) demand for imports will rise - if prices haven’t risen abroad imports will become cheaper in comparison.

Question 11

What causes a shift to the right of the AD curve?

Answer 11

A rise in ad if it hasn’t been caused by a change in he price level

Question 12

How does the shift to the right of AD impact the level of employment ?

Answer 12

Labour is derived demand therefore an increase in ad means output increase, so the demand for labour increases. More jobs are created so that extra output can be produced and therefore there will be an increase in employment

Question 13

What does aggregate supply mean?

Answer 13

The total amount of goods and services with can be supplied in an economy at different price levels over a period of time.

Question 14

Why do changes in the factors of production cause a shift of the AS curve?

Answer 14

Improvement in the factors of production will cause the AS curve to shift to the right as its cheaper to produce the same amount of good.
Improvement in education and skills- labour productivity improves
A supply of new resources
An increase in heather care means people take less time of work and produce more products
Greater competition in an economy will cause a fall in prices.

Question 15

How does the shit in AD impact the four main macroeconomic indicators?

Answer 15

If there’re an increase in aggregate demand there’s an increase in output therefore there’s an increase in economic growth and because of increase in derived demand more jobs are created and unemployment is reduced. But a rise in price level means there’s a rise in inflation, higher prices may also lead to a lack of competitiveness internationally therefore there a decrease in exports. A decrease in AD has the opposite effect

Question 16

How does the shift in AS impact the 4 macroeconomic indicators?

Answer 16

An increase in AS will lead to an increase in capacity this results in increase in output so there’s increased economic growth. There will be more jobs reducing unemployment reducing price level so more competitive world wide and improving balance of payments. A decrease would do the opposite.

Question 17

Describe the short run aggregate supply

Answer 17

In the short, factors and costs of production are fixed so if there’s an increase in the price level, firms profit per unit also increases.
The SRAS will shift if there’s a change in the cost of production
Changes in things such as wages rates and taxes firms pay and productivity will shut the SRAS curve

Question 18

Describe the circular flow of income

Answer 18

The economy is made out of firms and households.
Firms produces all the goods and services and these make up the national income
Households provide labour land and capital that firms use to produce the national output.

Question 19

Describe the long run aggregate supply

Answer 19

In the long run its assumed that because factors and costs of production can change an economy will move towards an equilibrium where all resources are being used to their full capacity.