Aggregate Demand and Supply Flashcards
What do models of aggregate demand and supply give?
They give economists another way to explain macroeconomic problems such as inflation, unemployment and growth.
What does aggregate demand simplify to?
Total demand and supply.
What is the definition of aggregate demand?
It is the total spending on domestic output at any given price level.
What does rising AD mean?
Growing.
What does falling AD mean?
Shrinking.
What are the four components of aggregate demand?
Consumption
Investment
Government Spending
Net Exports
How do you calculate net exports?
Exports - Imports
How do you calculate aggregate demand?
Consumption + Investment + Government Spending + (Net Exports - Imports)
Is aggregate demand normally positive or negative in the UK?
Negative, due to the UK having a negative balance of payments deficit.
What will changes in price level cause?
Movement along aggregate demand curve.
What can the shift by caused by?
fall in interest rates
cut in direct taxes
fall in exchange rate
advances in tech
What happened to AD during the credit crunch?
AD fell dramatically, bank of England cut interest rates to encourage spending.
What does ZIRP stand for?
Zero Interest Rate Policy
What is MPC?
Marginal Propensity to Consume - refers to how much extra income will be spent.
When may firms invest more?
Low Tax rate (corporation)
low interest rates
easy credit
high confidence
What is investment a component of?
Aggregate Demand
What is rising AD referred to as?
Actual growth.
What is the multiplier effect?
Any injection will go round more than once.
What is marginal propensity?
Amount of any extra injection that is used for consumption.
What is investment?
Spending by firms on capital.
What was the point in ZIRP?
Cheap money, pushing up investments.
What does accelerator theory argue?
The level of investment in new capital goods is induced by a change in the rate of growth of national income.
As growth increases, investment increases.
What is falling government spending called?
Austerity.
What are the fiscal implications of unemployment?
Government Spending more for State Exports.
Why is the multiplier effect important?
It means that the government can use relatively small changes in spending or taxation to bring a larger change in national output.
What will happen when the government runs a budget deficit?
National debt will rise.
When will the AD curve shift right?
When the budget deficit changes.
What increases consumption?
Increasing house prices
Increasing economic confidence.
What increases investment?
Low interest rates.
What increases exports?
More competitive and better at what we do.
What is aggregate supply?
Total output that all producers in the economy are willing.
What is Short Run Aggregate Supply
Output supplied in a time period when the level of capital is fixed.
What is long run aggregate supply?
The output supplied when the economy is producing.
What is the link between prices and firms supply?
Firms will be more willing to supply as prices rise.
How do firms react to higher costs?
Firms are discouraged, less profit incentive.
What do firms do when costs have fallen?
Firms chase profits.
What is capital?
Goods that make other goods.
What does capital expenditure simplify to?
Investment.
What does the keynesian theory believre?
Markets fail, governments need to get involved.
What does the free market view believe?
Markets work efficiently and should be left alone by governments.
What does a right shift on a Keynesian graph show?
Increased maximum capacity, economic growth from yfe to yfe 1
What is the best way to cause a right shift on Keynesian graph?
Investment.
What does a right shift on the new classical curve mean?
Increased maximum capacity, economic growth from yfe to yfe 1.
What do Keynesians believe that New Classicals dont?
We can be below Yfe in the long run.
