chapter 10.1-10.3

Question 1

describe the full circular flow diagram

Answer 1

• income flows between households and firms and back again in a constant cycle.
• entrepeneurs buy factors of production from households, such as labour, land, and capital, so they can set up businesses to produce goods and services
• once goods and services have been produced, firms sell these to households.
• households use the income they earned by sellign factors of production to pay for the goods and services they need and want

Question 2

list the factors that impact consumption and investment and so aggregate demand

Answer 2

• the AD curve will shift if there is a change in the value of CIGXM
• e.g. if there is a rise in business confidence then investment will increase
• e.g. a fall in interest rates will cause consumption and investment to increase
• both of these cause the AD curve to shift right

Question 3

describe the accelerator process

Question 4

what is an economic shock?

Answer 4

• it is an unexpected event hitting the economy
• this can be demand-side or supply-side shocks
• e.g. a war in the middle east may affect demand by causing a sudden collapse in consumer and business confidence and aggregate supply via its effect on the supply and price of crude oil

Question 5

define AD and state the relationship between price level and AD

Answer 5

• as price level increases, aggregate demand contracts as people can afford to spend less. As well as this, when price level rises, imports and exports decrease