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Macro > Aggregate demand and aggregate supply and their interaction > Flashcards

Aggregate demand and aggregate supply and their interaction Flashcards

1
Q

What is aggregate demand?

A

The total demand for a country’s goods and services at a given price level and in a given time period

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2
Q

What are the components of aggregate demand?

A

C + I + G + (X-M)

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3
Q

What is consumer expenditure?

A

Spending by households on consumer products

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4
Q

What is investment?

A

Spending on capital goods

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5
Q

What is government spending?

A

Spending by the central government and local government on goods and services

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6
Q

What are exports?

A

Products sold abroad

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7
Q

What are imports?

A

Products bought from abroad

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8
Q

What are net exports?

A

The value of exports minus the value of imports

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9
Q

What are transfer payments?

A

Money transferred from one person or group to another not in return for any good or service

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10
Q

What is job-seekers allowance?

A

A benefit paid by the government to those unemployed and trying to find a job

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11
Q

What are the factors which affect consumer expenditure?

A
  • Real disposable income
  • Wealth
  • Consumer confidence and expectations
  • The rate of interest
  • Inflation
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12
Q

What is consumer confidence?

A

How optimistic consumers are about future economic prospects

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13
Q

What is the proportion of income that is spent called?

A

Marginal propensity to consume

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14
Q

What are the factors influencing saving?

A
  • Real disposable income
  • The rate of interest
  • Confidence and expectations
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15
Q

What are the factors influencing saving?

A
  • Real disposable income
  • The rate of interest
  • Confidence and expectations
  • Government policies
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16
Q

What are the factors influencing investment?

A
  • Changes in real disposable income
  • Corporation tax
  • Capacity utilisation
  • The rate of interest
  • Advances in technology
  • Price of capital spending
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17
Q

Why does changes in real disposable income affect investment?

A

If real disposable income is rising, demand for consumer goods and services is also likely to be rising. This may encourage firms to expand their capacity.

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18
Q

Why might changes in real disposable income not affect investment?

A

Firms have to believe that the rise in demand will last and that their existing capital goods are not sufficient to produce the extra output

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19
Q

Why might changes in real disposable income not affect investment?

A

Firms have to believe that the rise in demand will last and that their existing capital goods are not sufficient to produce the extra output

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20
Q

Why would a fall in the interest rate stimulate a rise in consumer expenditure?

A
  • It makes it cheaper for customers to borrow in order to buy expensive items such as cars
  • It reduces the incentive to save because by spending now people are giving up less interest
  • Those who are paying interest on a mortgage or on any other type of loan will have more money to spend
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21
Q

Why does capacity utilisation affect investment?

A

Firms are more likely to invest if they are currently operating close to full capacity

In contrast, if they have considerable spare capacity (unused capital goods) they may be able to increase output without having to buy new capital goods

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22
Q

What is corporation tax?

A

A tax on firms profts

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23
Q

Why might corporation tax affect investment?

A

A cut in corporation tax increases the amount of profit firms can keep and so can result in an increase in investment

A government can also stimulate investment by providing investment subsidies

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24
Q

Why might a rise in the rate of interest cause a reduction in investment?

A
  • Increase opertunity cost of investment
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25
Q

Why might a rise in the rate of interest cause a reduction in investment?

A
  • Increase opportunity cost of investment.
    A firm can use its profit for investment, placing it in financial institutions to earn interest, or distributing it to shareholders in the form of dividends. Opting to buy capital goods when the rate of interest rises would involve foregoing more money on, for instance, a saving account in a bank. Although most investment is financed out of retained profit, some is financed by borrowing.
  • A higher interest rate would make it more expensive to borrow, and so may discourage some investment projects
  • A change in the rate of interest will affect the expected return of the investment. A higher rate of interest is likely to reduce investment, as firms will anticipate that consumer spending will fall
  • A rise in the rate of interest tends to reduce the demand for shares. This is because some people, who might of bought shares, may now place their money in an interest-bearing account instead. Lower demand for shares will reduce the price level and so decrease the finds that firms can raise for investment
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26
Q

Why might a rise in the rate of interest cause a reduction in investment?

A
  • Increase opportunity cost of investment.
    A firm can use its profit for investment, placing it in financial institutions to earn interest, or distributing it to shareholders in the form of dividends. Opting to buy capital goods when the rate of interest rises would involve foregoing more money on, for instance, a saving account in a bank. Although most investment is financed out of retained profit, some is financed by borrowing.
  • A higher interest rate would make it more expensive to borrow, and so may discourage some investment projects
  • A change in the rate of interest will affect the expected return of the investment. A higher rate of interest is likely to reduce investment, as firms will anticipate that consumer spending will fall
  • A rise in the rate of interest tends to reduce the demand for shares. This is because some people, who might of bought shares, may now place their money in an interest-bearing account instead. Lower demand for shares will reduce the price level and so decrease the finds that firms can raise for investment
27
Q

Why might a rise in the rate of interest cause a reduction in investment?

A
  • Increase opportunity cost of investment.
    A firm can use its profit for investment, placing it in financial institutions to earn interest, or distributing it to shareholders in the form of dividends. Opting to buy capital goods when the rate of interest rises would involve foregoing more money on, for instance, a saving account in a bank. Although most investment is financed out of retained profit, some is financed by borrowing.
28
Q

Why might advances in technology affect investment?

A

A firm may buy new capital equipment if it thinks that it will produce better quality products (anticipating higher demand) or produce products more cheaply (anticipating it’s unit cost would fall) . Either case, It is expected to earn a higher profit.

29
Q

What influences government spending?

A
  • The governments view on the extent of market failure and its ability to correct it.
  • The level of economic activity in the economy (high level of unemployment -> raise G in a bid to increase AD and output) OR (high inflation -> decrease G)
  • A desire to please the electorate (voters putting pressure on government)
  • War, terrorist attacks and rising crime
30
Q

What influences net exports?

A
  • Real disposable income abroad
  • Real disposable income at home
  • The domestic price level
  • The EXCHANGE rate
31
Q

Why might real disposable income abroad affect net exports?

A

A rise in income abroad is likely to result in more exports being sold

32
Q

Why might real disposable income abroad affect net exports?

A

A rise in income abroad is likely to result in more exports being sold.

33
Q

Why might a rise in income at home lead to a fall in exports?

A

Firms may divert some products from the export market to the home market to meet the rising domestic demand

34
Q

What will happen to net exports if the domestic price level rises relative to the price levels in the country’s trading partners?

A

The value of exports may fall and the value of imports will rise

35
Q

How does the exchange rate affect net exports?

A

A fall in a country’s exchange rate will reduce the price of exports and increase the price of imports.

36
Q

What are the three effects which explain why the AD curve is downwards sloping?

A
  • The wealth effect
  • The rate of interest effect
  • The international trade effect
37
Q

What is the wealth effect?

A

Changes in households and firms real wealth when the price level changes.
A fall in the price level increases the amount of goods and services that wealth, can buy.

38
Q

What is the rate of interest effect?

A

A rise in the price level means some people will sell financial assets such as government bonds, to obtain more money to pay the higher prices. The resulting increase in the supply of government bonds reduces their price. Such a change in the price of bonds raises the percentage rate of interest. This is because the amount paid in interest on a bond stays the same when its price alters

39
Q

What is the rate of interest effect?

A

A rise in the price level means some people will sell financial assets such as government bonds, to obtain more money to pay the higher prices. The resulting increase in the supply of government bonds reduces their price. Such a change in the price of bonds raises the percentage rate of interest. This is because the amount paid in interest on a bond stays the same when its price alters.

40
Q

What affect does a change in prove level cause on an AD curve?

A

A movement along

41
Q

What is aggregate supply?

A

The total output of goods and services that producers in an economy are willing and able to supply at different price level in a given time period

42
Q

What is the shape of the AS curve influenced by?

A

The level of the capacity existing in the economy

43
Q

What does a change in the AS mean

A

The total output that producers are willing and able to supply at any given price level alters.

44
Q

What is the main causes of changes in AS in the short run?

A

Changes in the costs of production

45
Q

What are the main causes of changes in AS in the short run?

A

Changes in the costs of production

46
Q

What are the main causes of changes in AS in the long run?

A
  • Changes in the quantity and quality of resources
47
Q

When does macroeconomic equilibrium occur?

A

When aggregate demand and aggregate supply are equal

48
Q

What is the circular flow of income?

A

The movement of spending and income throughout the economy

49
Q

Name the three injections into the circular flow of income

A
  • Investment
  • Exports
  • Government spending
50
Q

Name the three leakages out of the circular flow of income

A
  • Saving
  • Imports
  • Taxes
51
Q

What is the multiplier effect?

A

The process by which any change in a component of aggregate demand results in a greater final change in real GDP

52
Q

What happens when injections exceed leakages in the circular flow of income?

A

Aggregate demand will increase

53
Q

What are the three key influences on the effect of a change in AD on the output of an economy, unemployment and inflation?

A
  • The size of the initial change
  • The size of the multiplier
  • The original level of economic activity
54
Q

What are the three key influences on the effect of a change in AD on the output of an economy, unemployment and inflation?

A
  • The size of the initial change
  • The size of the multiplier
  • The original level of economic activity
55
Q

What does the effects of changes in AS depend on?

A
  • The size of the change

- The initial level of economic activity

56
Q

Why can AS rise?

A
  • Advances in technology

- Improved education

57
Q

What happens if AD grows more rapidly than the growth of productive capacity?

A

Inflation

58
Q

What change can have an affect on both AD and AS?

A
  • A decision by firms to spend more on capital goods
    • This will increase both total spending and productive capacity
  • Immigration of people of working age and government spending on training (raises workers productivity)
59
Q

What change can have an affect on both AD and AS?

A
  • A decision by firms to spend more on capital goods
    • This will increase both total spending and productive capacity
  • Immigration of people of working age and government spending on training (raises workers productivity)
60
Q

What is an output gap?

A

The difference between an economy’s actual and potential real GDP

61
Q

When does an output gap exist?

A

When an economy is not producing at full capacity

62
Q

When does a negative output gap occur?

A

When the economy’s actual output is below its potential output

63
Q

When does a positive output gap occur?

A

When an economy’s actual output is above that of it’s potential output

Macro (7 decks)

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