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AS Macro Retake > Chapter 1 > Flashcards

Chapter 1 Flashcards

0
Q

What components make up AD?

A

Consumer expenditure
Investment
Government spending
Net exports

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1
Q

What is aggregate demand?

A

The total demand for a country’s goods and services at a given price level and in a given time period

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2
Q

What is the price level?

A

The average of each of the prices of all the products produced in an economy

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3
Q

What component of AD has typically the largest proportion?

A

Consumer expenditure

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4
Q

What is government spending?

A

Spending by the central government and local government on goods and services

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5
Q

What type of payment does government spending NOT include?

A

Transfer payments

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6
Q

List the main influences on consumer expenditure

A 
Real disposable income
Wealth
Consumer confidence and expectations
Interest date
Age structure of population 
Distribution of income
Inflation
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7
Q

How does real disposable income influence consumer expenditure?

A

Typically the more money someone has, the more they will spend, however MPC falls as disposable income rises

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8
Q

How does wealthy influence consumer expenditure?

A

It increases consumer confidence

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9
Q

How does the interest rate affect consumer expenditure?

A

A fall in interest rate increases consumer expenditure for 3 reasons:
Makes it cheaper to borrow money
Reduces incentive to save
Those paying off mortgages and loans will have more money

However, this may not occur if economy is perceived to be unstable, or if there are many net savers in the economy

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10
Q

How does age structure of the population influence consumer expenditure?

A

Old and young typically spend a higher proportion of their income

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11
Q

How does distribution of income affect consumer expenditure?

A

Poor spend a higher of their proportion than the rich, so redistributing income from rich to the poor will increase total spending

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12
Q

Define inflation

A

A sustained rise in the price level

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13
Q

What are the main influences on saving?

A 
Real disposable income
Interest rate
Confidence and expectations 
Saving schemes
Range of financial institutions 
Government policies 
Age structure of populations
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14
Q

For whom would an increase in the interest rate NOT increase saving?

A

Target savers, people who aim to save a certain sum in savings

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15
Q

Give an example of a government policy influencing saving

A

Introducing tax-free saving schemes will increase saving incentives

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16
Q

List the factors influencing investment

A 
Changes in real disposable income
Expectations
Interest rate
Capacity utilisation
Current profit levels
Corporation tax
Advances in technology
Prices of capital equipment
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17
Q

List the factors influencing government spending

A

Governments view on extent of market failure and it’s ability to correct it
Level of economic activity in the economy
Desire to please electorate
War, crime etc

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18
Q

How may the level of economic activity in the economy influence government spending?

A

For example if there’s high unemployment the government may increase spending to try to raise AD and output of economy

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19
Q

What are the main influences on net exports?

A 
Real disposable income abroad
Real disposable income at home
Domestic price level
Exchange rate
Government restrictions on free trade
20
Q

How might rising disposable incomes at home influence net exports and why?

A

It would cause a decline in net exports, as firms may divert some products from the export market to the home market to meet the rising demand

21
Q

How may the government implement a restriction on free trade?

A

Placing a tariff on certain goods

22
Q

How is aggregate demand related to the price level?

A

Inversely

23
Q

What 3 ‘effects’ explain why the AD curve is downward sloping?

A

The wealth effect
The rate of interest effect
The international trade effect

24
Q

Describe the wealth effect

A

When a fall in the price level means an increase in the amount of goods and services can be bought for the same amount of money

25
Q

Describe the rate of interest effect

A

A rise in price level means some will sell financial assets to obtain more money to pay the higher prices, so more assets being supplied reduces their price and hence interest rate increases

26
Q

Describe the international trade effect?

A

Rise in price level, ceteris paribus, makes a country’s goods less internationally competitive, so households and firms buy from foreign producers more and hence AD contracts

27
Q

Define aggregate supply

A

The total amount that producers in an economy are willing and able to supply at a given price level, in a given time period

28
Q

In what situation is AS perfectly elastic?

A

When output is low and unemployment is high

29
Q

What is main cause of change of AS in short term?

A

Changes in costs of production

30
Q

What are the two main causes of shifts in AS curve long term?

A

Changes in quantity and quality of resources

31
Q

How may the quantity of enterprise be increased?

A

Reductions in rules and regulations, privatisation, government incentives to start up new businesses

32
Q

Define productivity

A

Output of a good or service per worker per unit of a factor of production, in a given time period

33
Q

What is a macroeconomic equilibrium?

A

A situation where aggregate demand equals aggregate supply, and real GDP is not changing

34
Q

What is the circular flow of income?

A

The movement of spending and income throughout the economy

35
Q

What are the flows within the circular flow of income?

A

Income, products, and factor services

36
Q

What are factor services?

A

The services provided by the factors of production

37
Q

What are the three leakages from the circular flow of income?

A

Taxes, savings and spending on imports

38
Q

What are the three injections to the circular flow of income?

A

Investment, government spending and exports

39
Q

Define the multiplier effect

A

The process by which any change in a component of aggregate demand results in a final change in real GDP

40
Q

What influences the effect of a change in AD on the output of an economy, unemployment and inflation?

A

Size of initial change, the size of the multiplier, original level of economic activity

41
Q

How might a rise in AD increase both output and price level?

A

If the economy moves from a position of significant spare capacity to one where there are shortages of resources, or if the economy moves from a position where there is a shortage of resources, to one where there is an even greater shortage in resources

42
Q

What is the effect of an increase in AD on an economy operating at full capacity?

A

Purely inflation

43
Q

What are the effects of changes in AS dependent on?

A

Size of the change and initial level of economic activity

44
Q

In what situation would an increase in AS have no impact on the economy?

A

If the economy was already operation at a low level of output with a large amount of unemployed resources

45
Q

What is overheating?

A

The growth in aggregate demand outstripping the growth in aggregate supply, resulting in inflation

46
Q

What is an output gap and when does it occur?

A

The difference between an economy’s actual and potential real GDP. It occurs when an economy is not producing at full capacity

47
Q

How may a positive gap be achieved?

A

If workers work overtime, some people normally not in the labour force get involved, machines run flat out.

AS Macro Retake (3 decks)

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