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

Answer 3

-The basic accelerator process is an economic theory that states that when there is increased demand for a product or service, companies will invest more money to meet that demand
-This leads to higher production, more jobs, and more income for individuals, which further stimulates demand

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

• aggregate demand is the total planned demand in the economy at different price levels, made up of CIGXM
• 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

Question 6

Define AS and state the relationship between price level and AS

Answer 6

• aggregate supply is the total planned supply in the economy at different price levels
• when price level rises, AS also rises because firms will make more profit so they want to produce more

Question 7

List the factors that can cause AD to increase / decrease

Answer 7

• CIGX increasing means AD increases
• Imports decreasing means AD increases
• CIGX decreasing means AD decreases
• Imports increasing means AD decreases

Question 8

List the factors that can cause AS to increase / decrease

Answer 8

• prices of resources
• efficiency of factors of production
• taxes

Question 9

What’s the difference between saving and investment?

Answer 9

• saving is income not spent on consumption
• investement is spending by firms on capital goods such as machines

Question 10

Which two diagrams can be used to illustrate an increase in LRAS?

Answer 10

• a ppf
• an LRAS curve