Aggregate demand (MAC) Flashcards

1
Q

What does aggregate demand mean?

A

It is the total amount planned spending on goods and services at a given price level in an economy in a year

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2
Q

What is the formula of AD?

A

C+I+G+(X-M)

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3
Q

What are the importance of the components of AD?

A

Consumption: most significant, 60% of the total

Government expenditure: usually 25% of AD

Investment: around 15% of AD

Net trade (X-M): insignificant element of AD

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4
Q

What is the real balance effect?

A

When the price level rises, the purchasing power of cash assets falls, which leads to a decrease in the demand for real output

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5
Q

What is the international trade effect?

A

A rise in price level causes a decrease in the international competitiveness of UK goods, causing a decrease in demand for exports and a rise in demand for imports.

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6
Q

What is the interest rate effect?

A

A higher price level results in an increased demand for money. As a result interest rates will rise, reducing consumption and investment causing a contraction in AD.

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7
Q

What causes a movement along the AD curve?

A

A price level change causes a movement along the AD curve.

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8
Q

What causes a shift in the AD curve?

A

AD shifts are caused by a change in any one of its components.

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9
Q

What happens when there is a change in AD?

A

An increase in AD leads to a right shift in the curve

A decrease in AD leads to a left shift in the curve

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10
Q

What is consumption?

A

It is spending by households on goods and services.

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11
Q

What is the main determinant of consumption?

A

Disposable income

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12
Q

What is disposable income?

A

It is the money people have available to spend on goods and services.

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13
Q

What is the measuring agent of the relationship between savings and consumption?

A

The average propensity to consume

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14
Q

What is the formula of APC?

A

consumption / disposable income x 100

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15
Q

What is the formula of APS?

A

savings / disposable income x 100

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16
Q

What other factors influence consumption?

A

Interest rates

Consumer confidence

Wealth effects

17
Q

What are interest rates?

A

They are the cost of credit for borrowing or the reward for saving.

18
Q

What is the wealth effect?

A

The wealth effect is the effect on spending when asset prices change.

19
Q

What is consumer confidence?

A

The feeling of security by households in their jobs and their future prospects.

20
Q

What is investment?

A

Investment is defined as an increase in the capital stock

21
Q

What is gross investment?

A

Total expenditure on new capital goods

22
Q

What is net investment?

A

New additions to capital stock after taking into account the fall of value of capital assets

23
Q

What are the influences on investment?

A

Rate of economic growth

Business expectations and confidence

Demand for exports

Interest rates

Access to credit

Influence of government

Government regulations

24
Q

What are the influences on government expediture?

A

Trade cycle

Fiscal policy

25
Q

What is net trade?

A

Exports - imports

26
Q

What are the influences on the net trade balance?

A

Real income

Changes in the exchange rates

Changes in the world economy

Degree of protectionism

Non price factors:

quality and design
reliability
after sales service
transport costs