Booklet Two Flashcards
What is aggregate demand?
The total planned spending on the output (goods and services) produced in an economy
Aggregate demand is made up of 4 components
Consumption
Investment - spending by firms on capital
Government spending
Net exports - (exports-imports)
Formula for aggregate demand
AD = C + I + G + ( X - M)
aggregate demand = consumption + investment + government spending + (exports - imports)
what is consumption or consumer spending?
The act of using disposable income for the purchase of goods and services
Consumers spending is divided into three main areas:
.consumer durable
.consumer non durable goods
.services
Influences on consumer spending (7)
.Real income
.Unemployment
.Consumer confidence
.Wealth and the ‘wealth effect’
.Taxation
.Population
.Interest rates and the availability of credit
what is interest?
interest is the cost of borrowing and the reward for saving with financial institution
In the UK who is responsible for setting the interest rates (2%)
The bank of England
what is the bank of England base rate?
5.25%
when does the economy reaches a state of equilibrium?
when the rate of withdrawals = the rate
of injections.
Interest payments that affects consumers : (4)
1)savings - interest for saving goes up meaning consumers are less likely to spend
2)Variable mortgage rates increase - disposable income decreases
3)Loan - interests rate are low people are more likely to take out a loan
4)credit
what is consumer confidence?
Households willingness to spend their incomes and also take on debt
Define marginal propensity to consume (MPC)
The portion of an increase in income that is spent
What is the average propensity to consume (APC)
The proportion of a consumers total disposable income that they spend
What is the multiplier effect?
The multiplier effect occurs when an initial increase in aggregate demand has a bigger impact on the real national income
The multiplier effect process (4)
1)Initial increase in aggregate demand
2)Increases the real national output
3)Increase in consumers spending
4)Aggregate demand increase again
(The multiplier also works in reverse)
Formular for calculating the size of the multiplier
Size of the multiplier = 1/(1-MPC) = 1/MPS
The formula for the final increase in national income
Initial increase in spending X The value of the multiplier
What is investment?
spending by firms on capital
A country’s gross investment includes 2 parts
What are they?
Replacement investment - spending to fix old capital
Net investment - spending on new capital
The determinants of investment in fixed capital are: (9)
(factors that influence the decisions of businesses or individuals to invest in long-term assets)
1)Price of labour
2)Price of capital
3)Consumer confidence
4)Technological change
5)taxation
6)interest rate
7)market growth
8)business cycle
9)Business confidence “animal spirits” Keynes
what is the accelerator effect?
When an increase in a component of aggregate demand (e.g. consumption) leads to an increase in investment triggering a further increases in aggregate demand
The accelerator effect process (4)
1)initial increase in aggregate demand
2)(some) firms need more capital to produce additional output
3)firms invest more
4)Aggregate demand increases again
What is government spending?
expenditures made by the government in the economy (e.g. the public sector things such as hospital, prisons and schools)
What is crowding out?
occurs when increased government spending leads to a decrease in private sector spending (businesses or individuals)
what is short run growth?
The time period in which at least one factor of production is fixed in quantity
(a component in aggregate demand increases)
what is long run growth?
The time period in which all factors of production are variable in quantity
(higher quantity/quality of factors of production or technology changes)
what is the technical definition of a recession?
A recession is two consecutive quarters (6 months) of negative economic growth
What is the marginal propensity to save?
The portion of an increase in income that is saved
Factors that shift the LRAS curve to the right (classical or Keynesian) (8)
1)enterprise and innovation
2)education and training
3)increased productivity
4)discovery of natural resources
5)Population growth
6)New technology
7)increase in the size of the labour force
8)increased investment in capital
What does YFE mean on the long run aggregate supply?
Full employment of all factors of production
Factors that shift the LRAS curve to the left (classical or Keynesian) (4)
1)natural disaster or diseases
2)reduced productivity
3)net outward migration
4)capital investment below replacement level
