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Economics Alevel > Chapter 10 > Flashcards

Chapter 10 Flashcards

1
Q

State the components of aggregate demand

A

C: Consumer demand
I: Investment demand
G: Government demand
(X-M): Net exports

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2
Q

Factors that affect consumption

A
  • Disposable income
  • Consumer confidence
  • Interest Rate
  • Wealth
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3
Q

How does disposable income impact consumption?

A

Increased tax on income would cause the disposable income to drop, so people have less to spend. This reduces consumption an AD.

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4
Q

How does consumer confidence impact consumption?

A

Higher consumer confidence reflects that consumers are confident they’ll earn future money, so they’re more likely to spend and consume

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5
Q

How does interest rate impact consumption?

A

Increased interest rate would encourage people to save their money as they’d earn higher returns, so less spending

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6
Q

How does weath impact consumption?

A

Having backup jewelry, assets or gold.

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7
Q

Define propensity to save and consume

A

Refers to how individuals allocate their incomes between spending and saving; it studies economic behavior.

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8
Q

Define propensity to consume

A

Measures proportion of income that is devoted for consumption.

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9
Q

Define average propensity to consume (APC)

A

Total proportion of income that is devoted for income.

APC= C/Y

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10
Q

Define marginal propensity to consume (MPC)

A

Proportion of additional income that is devoted for income.

MPC= % change in expenditure/% change in income

**Higher MPC reflects economic growth.

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11
Q

Define propensity to save

A

Measures proportion of income that is set aside as savings.

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12
Q

Define average propensity to save (APS)

A

Total proportion of income set aside for saving.

APS= S/Y

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13
Q

Define marginal propensity to save (MPS)

A

Proportion of additional income that is set aside for savings.

MPS= % change in savings/% change in come

**Higher MPS reflects economic recession

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14
Q

Factors affecting MPC and MPS, as in how much to save and spend?

A
  • Income levels
  • Cultural Norms
  • Economic Expectations
  • Government policies.
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15
Q

Factors that affect investment

A
  • Interest rate
  • Business Confidence
  • Business expectations
  • Derived Demand

**Accelerator: Level of investment depends on level output (demand).

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16
Q

How does interest rate impact investment?

A

Low interest rates refers to low costs of borrowing, so firms would be willing to borrow money, and invest.

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17
Q

How does business expectations impact investment?

A
  • Expected profits: If the business expects future profits due to economic growth, they’d be more willing to supply as they’re confident they will sell out
  • Expected rise in prices: Business would be less likely to supply at the moment and wait till prices raise to earn higher profits
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18
Q

How does derived demand impact investment?

A

Increased derived demand, means there’s an increase on demand for a certain product, so firms would be more willing to demand machinery to keep up with demand

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19
Q

How does business confidence impact investment?

A

High business confidence translates to economic certainty, so business is more likely to invest.

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20
Q

Factors that affect government spending

A

This is autonomous, it is only affected by itself.

It depends on the type of policy it will implement.

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21
Q

Factors that affect net exports

A
  • Exchange Rate
  • Inflation Rate
  • Competitiveness of product
  • Having FTAs. (Being able to export/import without tariffs)
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22
Q

Define consumption function

A

Describes relationship between house consumption and disposable income

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23
Q

Define induced consumption

A

Consumption that is based off income levels. If incomes increase, households are more likely to spend.

24
Q

Define autonomous consumption

A

Consumption that is based off external factors, besides income levels. Like, interest rate and consumer confidence.

25
Define saving function
Relationship between household saving and disposable income.
26
Define induced saving
Saving that based off income levels, if incomes increase, people are more likely to save a percentage of it.
27
Define autonomous saving
Saving that's based off external factors besides income levels, like interest rate and consumer confidence.
28
Define production function
Relationship between level of investment and disposable income.
29
Define induced investing
Level of investment that's based off income levels, higher incomes so higher chances of investing.
30
Define autonomous investing
Level of investment that's based off external factors beside income levels, like interest rate and business confidence.
31
Define circular flow of income
An economic model that demonstrates the process by which income flows around the economy from one person to another
32
Define an open economy
An economy that is involved in international trade, and there is both injections and withdrawals.
33
Define a closed economy.
An economy that is not involved in international trade, and there's usually only 2 economic agents in the market.
34
List all injections
- Government Spending - Exporting - Investing **Increased injections signify that economy is operating and people are demanding. **This leads to higher multiplier **Exporting relies on an open economy and increased international trade.
35
List all withdrawals (leakages)
- Taxation - Saving - Importing
36
Define multiplier
Shows how many times money circulates in economy, the higher the faster.
37
Define multiplier effect
Refers to how an initial injection in an economy leads to an overall increase in GDP. **Like, in economic growth. Increased output leads to higher sales and profits, employment, exports, tax revenue and so on.
38
Explain a 2-sector economy. (Closed economy)
- There are only two economic agents: Households and Firms. - Injections= Investing - Withdrawals= Saving - Multiplier= 1/MPS
39
Explain a 3-sector economy.
- There are three economic agents: Households, Firms and Government - Injections= Investing and Govt. Spending - Withdrawals= Saving and Taxation - Multiplier= 1/MPS+MPT
40
Explain a 4-sector economy (Open economy)
- All economic agents are involved - Injections= Investing, Govt. spending and exports - Withdrawals= Saving, Taxation and imports - Multiplier= 1/MPS+MPT+MPM
41
Explain paradox of thrift
An example of **multiplier effect.** A theory that explains how increased savings on the short-run will lead to lower incomes on the long-run. During recessions, people are more likely to save their money than spend due to low consumer confidence. This leads to decreased aggregate demand, so firms operate less and earn lower profits, so they'll start to lay off more workers to reduces costs, so this leads to lower incomes and GDP drops.
42
Explain inflationary gap
- Occurs when there's excessive aggregate demand over level of output and full employment - Economy is operate above productivity capacity, in terms of people are working overtime and machines are working above their limits. - Economy is overheated. - Economy is growing too fast and uncontrollably, it poses a long-term risk of inefficiencies and high inflation. **Actual AD > Potential AD
43
Explain deflationary gap
- Occurs when there's insufficient AD; economy is operating below potential output. - Economy is slow and not reaching it's productive capacity, and there is unemployed capital and labour - Low spending **Potential AD > Actual AD
44
Economic growth, summarized
Must increase aggregate supply and aggregate demand.
45
Define output gap
Difference between actual and potential ouput.
46
Define positive output
Actual output > Potential output. Economy is working beyond its maximum capacity, people are working overtime and machinery are working over their limits. There is excess demand. **Unattainable point on PPC
47
Define negative output
Potential Output > Actual Output Economy is working below full employment; there are unused and unemployed resources, like unemployed labour and idle machinery. **Inefficiency in PPC
48
How to achieve actual economic growth?
- Expansionary fiscal policy - Expansionary monetary policy - Supply side policy
49
How to achieve potential economic growth?
- Increasing all quantities and qualities of production
50
Explain Washington consensus
A policy that promotes economic growth. 1) Fiscal discipline: Carrying out fiscal policy 2) Reallocation of public spending: Shifting towards healthcare and education 3) Tax reform: Lower corporation taxes and employer payroll 4) Liberalization of IR: interest rate determined by market forces 5) Exchange rate competitiveness: Maintain a stable and competitive exchange rate to promote exports and economic stability 6) Trade liberalization: Removal of protectionism to encourage international trade 7) FDI liberalization: Open economy to attract investors 8) Privatization 9) Deregulation 10) Secure property rights: Ensure legal protection of property rights to encourage investment
51
Policies to achieve sustainable economic growth
Resources: Limit overproduction through taxes and minimum price and use renewable resources. Amenities: Less factories and more green spaces. Absorber of waste: Recycling and Reusing
52
Advantages and disadvantages of economic growth
- Higher GDP which indicates higher GDP per capita, so higher living standards - Increased profits and sales for firms, encouraging them to invest mre - Higher exports - Higher employment - Tax revenue for government - Overcome poverty x Inflation x Pollution x Resource depletion x Social Inequality x Firms may become capital intensive
53
How do Investments by MNCs lead to economic growth?
**Analyze how each AD component increases. - Increased MNCs, increased investment demand - Those investors demand more labour to be able to keep up with derived demand, so more employment. They earn high wages and can spend more, so increased consumer demand - High tax revenue, increased government demand - Excess supply can be exported, increased exporting demand - There is now a local substitute, so no need to import. - Overall there is an increase in injections, so has a positive impact on circular flow of income x Resource depletion, future generations won't be able to produce x Negative externalities from productions x Demotivates domestic production, so low output x Might import labour, raw materials and machinery. x Profit switching
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Economics Alevel (13 decks)

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