All about AD

Question 1

What is AD/ equation

Answer 1

Total demand for the economy (aggregate demand)

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

Question 2

What is the circular flow of income?

Answer 2

A diagram showing monetary flows between households and firms, and the flow of factors of production and goods and services.

Households provide the factors of production eg labour for firms (inputs) and firms provide goods and services in return (out puts)

Money flows from households to firms as expenditure, and from firms to households as wages/. income

Question 3

What are injections and leakages of the circular flow of income

Answer 3

Injections- make the economy run faster/ grow more

Investment (i), government expenditure (g) and exports (x)

Leakages/withdrawals- slow the system/ economy down
Savings (s), taxation (t) and imports(m)

Question 4

What is the link between circular flow of income and AD

Answer 4

injections increase AD whilst withdrawals reduce AD.

eg the govt investing in schools is increasing AD with an injection, but the government increasing taxes without increasing spending is reducing AD with a withdrawal as consumers having less money to spend.

Question 5

What is marginal propensity to consume??

Answer 5

Determines how much an injection will increase AD

MPC= change in consumption / change in income

The higher the MPC, the bigger the Impact of an injection.

Question 6

What is the MPW??

Answer 6

Marginal propensity to withdrawal measures the leakages and is MPS+MPT+MPM

MPC + MPW = 1

Question 7

What is GDP and how do you measure GDP per capita??

Answer 7

GDP= gross domestic product, measures the size of the economy

GDP/ population= GDP per capita

Question 8

What causes shifts in the AD curve?

Answer 8

Shift to the right= increased consumer spending / more exports compared to imports / increased govt expenditure

shift to the left= the opposite of these

affected by -The level of investment/ business confidence

• The size of MPC
• the propensity to leak eg imports, tax levels

Question 9

What affects AS / aggregate supply??

Answer 9

Anything that affects the factors of production

Land- rent, availability
Labour- wage levels, immobilities
Capital- rent, interest, regulations
Enterprise- regulations/ incentives/ profit potential