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Macroeconomics > Aggregate Demand and Supply > Flashcards

Aggregate Demand and Supply Flashcards

1
Q

What is aggregate demand?

A

The total demand for goods and services produced in an economy at a given price level and in a given period of time.

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2
Q

What are the components of AD?

A

Consumer Expenditure 65% + Investments from firms 15% + Government expenditure 22%+(Exports -imports)-2% (2013-ONS)

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3
Q

What is the formula for AD?

A

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

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4
Q

Name the determinants of Consumer expenditure

A 
Income 
Wealth
Inflation 
Interest rates 
Confidence levels 
Demographics of a country
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5
Q

How does a persons income impact their spending?

A

The higher someone’s income is the more they will spend, as they have more disposable income.

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6
Q

How does a persons wealth impact their spending?

A

The higher the value of their assets (eg property) the more they’ll spend

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7
Q

How does inflation impact a person’s spending?

A

Inflation disincentives people from spending as their money is worth less. Therefore it may cause a shift to the left in AD.

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8
Q

How do interest rates impact a person’s spending?

A

The higher the interest rates are the greater the amount of people that borrow will be as their money will be worth more. Therefore it discencentives spending as high interest rates means loans cost more.

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9
Q

How do peoples confidence levels impact their spending?

A

If people are worried about the economy or their job spending will decrease.

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10
Q

How do the demographics of a country impact a person’s spending?

A

As the age of the population changes so does their spending eg an ageing population may mean less money is spent on alcohol.

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11
Q

How does interest rate effect a firms investment in a country.

A

Interest rate determines the cost of borrowing, a high interest rate means borrowing becomes expensive so demand for borrowing will fall meaning some firms won’t be able to invest.

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12
Q

What are the determinants of firm investment?

A

Interest rates

Stability of the economy

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13
Q

What is the equation for the multiplier?

A

1/MPW

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14
Q

What is the equation for the multiplier?

A

1/MPW

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15
Q

How does the stability of the economy effect firm investment?

A

If a firm thinks an economy may collapse they are less likely to invest.

This is why some argue high inflation increases uncertainty and therefore discourages investment

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16
Q

What are the determinants of government spending ?

A

The level of economic activity- during a recession a large amount of people are unemployed so more benefits must be payed.

Economic climate in other countries

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17
Q

What are the determinants of exports and imports ?

A

The exchange rate between the sterling and other currencies
Inflation in UK and other countries

Aggregate Income

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18
Q

How will The exchange rate between the sterling and other currencies effect exports and imports

A

If the UK has a strong pound, the UKs exports are less competitive in contrast to other countries. and vice versa

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19
Q

How will Inflation in UK and other countries effect exports and imports

A

if inflation in the UK is high while exports overseas is low the UKs exports will be less competitive.

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20
Q

How will Aggregate Income effect exports and imports

A

Because of YED if income in the uk is high they’ll be more demand for uk goods however low income overseas will reduce demand for uk exports

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21
Q

Is there a relationship between changes in income and

consumption of goods and services?

A

It’s suggested that disposable income is a major determinant of consumer expenditure and a higher income means more spending.

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22
Q

What is the average prosperity to consume?

A

The fraction of income spent

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23
Q

What is the marginal propensity to consume?

A

The proportion of an increase in disposable income that is spent.e.g 10% raise, looking at how much of this money is spent.

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24
Q

What is the marginal propensity to save?

A

The proportion of an increase in disposable income that is saved.

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25
Q

What is the consumption function

A

The relationship between consumer spending (x) and income (y)

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26
Q

What is the purpose of the Aggregate demand curve?

A

To show relationship between aggregate demand (consumer expenditure+ firm investment +government spending +(exports- imports) ) and the overall price level. The curve shows the total amount of goods and services that are demanded in an economy.

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27
Q

What is the price level

A

The average price level of all the goods and services produced in an economy

28
Q

How does consumer expenditure explain why the Aggregate demand curve slopes downwards?( as in high price level means low AD, low price level means high AD)

A

Consumer expenditure makes up a large amount of AD and at a low price level consumers can get more for their money as the purchasing power of income is high.

29
Q

How do interest rates explain why the Aggregate demand curve slopes downwards?( as in high price level means low AD, low price level means high AD)

A

When the price level is low interest rates tend to be too, eg in Jan 2016 inflation rate was 0.1% and interest rates were at 0.5%. Since interest rate represents the cost of borrowing, low interest rates encourage firm investment and consumer expenditure as it encourages firms and people to take out loans.The C+I part of AD is being affetced

30
Q

How does a low price level for the UK thus raising competitiveness for UK exports explain why the Aggregate demand curve slopes downwards?( as in high price level means low AD, low price level means high AD)

A

It can be argued that a low price level in the UK means that there’ll be more demand for UK exports as the UKs prices will be relatively low compared to the rest of the world. Also, there’ll be less demand for imports of goods from other countries as UK goods are cheaper. This effects the (X-m) part of AD

31
Q

What is the multiplier?

A

That a change in one area of AD may lead to knock on effects to other parts of AD.

32
Q

What does the size of the multiplier depend on?

A

If there are leakages in the system e.g the marginal prosperity to save/import/tax

33
Q

What is the marginal prosperity to import?

A

The proportion of additional income that is spent on imports of goods and services (from other countries) e.g a holiday.

34
Q

What is the marginal prosperity to tax?

A

The proportion of additional income that is taxed

35
Q

What is the marginal prosperity to withdraw?

A

The proportion of additional income that is withdrawn (taken away) from the circular flow - the sum of the marginal prosperities to save,tax and import.

36
Q

What is aggregate supply?

A

The relationship between the overall price level and the total amount of goods and services that are supplied in an economy during a period of time.

37
Q

Short run aggregate supply

A

The amount of goods and services that a firm is able to supply in the short term over a given period of time.

38
Q

How do firms try to increase AS in the short run and why is there inflexibility to do so?

A

In the short run a firm can only make the use of the factors of production more efficient, e.g asking employees to work overtime rather than getting more employees.

39
Q

Why is how effectively the of factors of demand are used an important influence on the position of the AS curve.

A

An increase in the efficiency of factors of production is important as it causes a shift to the right in SAS.E.g improvements in technology will cause an increase in eefficiency in capital and cause a shift to the right in AS.

40
Q

How does the cost of production faced by firms effect aggregate supply

A

A change in costs faced by firms my caus them to supply more of a good eg if a key raw material increases in price the firm may reduce output causing a shift in the AS curve

41
Q

What are some factors that can cause an increase in the costs faced by firms

A

Reserves of a non renewable resource causes prices to rise rapidly

Change in exchange rate eg a strong pound vs dollar means materials imported from America seem cheaper so a firm may supply more

Regulation - Forced to pay more on health and safety measures may cause them to supply less

Transport costs- Increase in congestion raises prices while increase in infrastructure in terms of transport reduce prices

42
Q

What is the macroeconomic equilibrium?

A

When aggregate supply and aggregate demand meet

43
Q

What are the 2 factors that a change in the macroeconomic equilibrium may be a result of

A

Aggregate demand

Aggregate supply

44
Q

How can changes in AD effect inflation

A

A shift to the right in AD causes an increase in the price level

45
Q

How can changes in AS effect inflation

A

A shift to the left in AS can cause a decrease in the price level e.g reduced cost of oil barrels is part of the reason for why the inflation rate is so low (0.1%) Jan 2016

46
Q

How is economic growth shown through the AS curve

A

When there is a shift to the right in the LRAS curve economic growth has occured as there has been an increase in the quantity of the factors of production.

47
Q

How is short run economic growth shown through the AD

curve

A

A shift to the right in the AD curve causes short run economic growth

48
Q

Why is short run economic growth not always sustainable?

A

IT may cause AD to be higher than what the factors of production can supply e.g increase in demand for petrol but not enough oil miners.

49
Q

How does the AD/AS curve effect unemployment

A

An economy becomes closer to full employment when there is a shift in AD.(Keynesian)

50
Q

\What do monetarists believe about full employment?

A

That the economy always returns back to a full level of employment.

51
Q

Explain the income side estimate method of measuring national income?

A

Looking at the way households earn their income.It looks at the balance between factors of production given to the firms (land,labour capital) and monetary rewards

52
Q

Explain the expenditure side estimate method of measuring national income?

A

This describes how resources are being used so we can see what proportion of society’s resources are being used for consumption and what is being used for firm investment

53
Q

Explain the output side estimate method of measuring national income?

A

This focuses on the economic structure of an economy ie the balance between primary production, secondary and tertiary.It looks at the total output that is produced

54
Q

What is meant by the circular flow of income?

A

The circular flow of income illustrates the flow of money threw economic activity between households firms injections and withdrawls

55
Q

What does the circular flow of income measure?

A

The total production of goods and services produced in an economy in a given period eg a year or quarterly.
This GDP

56
Q

What is GDP also known as?

A

National income

57
Q

What are the three methods to measure GDP?

A

Expenditure side estimate
Income side estimate
Output side estimate

58
Q

Illustrate the circular flow of income

A
  • Households provide firms with factors of production
  • Firms create goods and services
  • Households buy these goods and services
  • Firms provide households with salaries,and rent for the factors of production.
  • THere are injections into the ciruclar flow (Government spending,eXpots,firm Investment) there are also leakages in the form of (Taxation,iMPORTS,saving)
59
Q

What is meant by a leakage within the circular flow?

A

Withdrawl from the flow, when households must pay the government tax, choose to save income (average propensity to save).

60
Q

What is meant by a injection into the circular flow?

A

Introduction of extra expenditure into the flow, when the government spend, when firms invest, and exports.

61
Q

What is a physical flow?

A

Also known as real flow is the exchange of goods and services between households and firms

62
Q

What is monetary flow

A

The exchange of money between 2 sectors ie household and firm

63
Q

What do households and firms supply each other with in terms of physical flow?

A

Households supply firms with land labour and capital

Firms supply households with goods and services that are produced with these factors.

64
Q

What do households and firms supply each other with in terms of monetary flow

A

Firms reward households with salaries and rent

65
Q

Applying previous knowledge what is the average propensity to save

A

the amount of income that is saved

66
Q

Applying previous knowledge what is the average propensity to withdraw

A

The proportion of income that is withdrawn from the circular flow of income, through tax saving and imports

67
Q

What is the difference between income and wealth?

A

Income is a reward for use factors of production for example for labour you receive a salary however wealth represents the stock of accumulated past savings

Macroeconomics (13 decks)

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