Economic models

Question 1

What is aggregate demand?

Answer 1

The total demand in an economy, calculated by C + I + G + (X-M)

Question 2

What is aggregate supply?

Answer 2

The total supply in the economy

Question 3

What is a boom?

Answer 3

Peak of the economic cycle with high economic growth

Question 4

What is a bust?

Answer 4

The period of the lowest growth in an economic cycle aka a recession or trough

Question 5

What is the circular flow of income?

Answer 5

A model showing the flow of money, factors of production and goods/services in the economy

Question 6

What is consumption?

Answer 6

The use of goods and services

Question 7

What is a downturn?

Answer 7

Period of economic growth that is positive but is slowing down aka slowdown

Question 8

What is the economic cycle?

Answer 8

Fluctuations of economic activity over a period of time

Question 9

What are exports?

Answer 9

Goods sent to another country in exchange for money

Question 10

What is government spending?

Answer 10

All government expenditure which may be financed by taxes and/or government borrowing

Question 11

What are imports?

Answer 11

Goods brought into the economy in exchange for money

Question 12

What is investment?

Answer 12

The aquisition of goods that aren’t consumed in the current period, but are used in the future to produce other goods and services

Question 13

What is the National income?

Answer 13

Value of income, output or expenditure over a period of time

Question 14

What is an overheat?

Answer 14

Demand rises too fast and prices rise-the government wil try and correct this

Question 15

What is a recession?

Answer 15

2 consecutive quarters of negative growth

Question 16

What is a recovery?

Answer 16

Where GDP starts to rise again after a recession

Question 17

What are examples of demand-side shocks to the economy?

Answer 17

• Economic downturn in a trading partner
• Unexpected tax increases
• Financial crisis causing bank lending to fall
• Bigger than expected rise in unemployment

Question 18

What are examples of supply-side shocks to the economy?

Answer 18

• Steep rise in oil and gas prices or other commodities
• Political turmoil/strikes
• Natural disasters causing a sharp fall in production
• Unexpected breakthroughs in production technology

Question 19

What are the possible causes of a recession?

Answer 19

• External events
• Tightening of macro policy
• Fall in asset prices or supply of credit
• Drop in business and consumer confidence

Question 20

What are the short term effects of a recession?

Answer 20

• Business profits fall and capital investment declines
• Rising unemployment
• Decline in tax revenues and more welfare spending resulting in an increase in the budget deficit and a rising national debt
• Deflation due to businesses offering price discounts to off-load excess unsold stocks

Question 21

What are long term economic effects of a recession?

Answer 21

• Rising structural long-term unemployment and regional decline
• Low rates of investment reducing the size of the capital stock
• Persistant budget deficits and a rising national debt leads to austerity

Question 22

What are the long term social effects of a recession?

Answer 22

• Falling real wages hits average living standards and reduces demand
• Widening inequality of income and wealth leads to rising poverty
• Social costs such as loss of socials cohesion and threats to democracy

Question 23

What is the aggragate demand formula?

Answer 23

Household spending on goods and services (C) +
Business investment spending (I) +
Government Consumption (G) +
(Exports of Goods and Services (X)-Imports of Goods and services (M))

Question 24

What causes aggregate demand to fall?

Answer 24

• Fall in exports
• Cut in government spending
• Higher interest rates
• Decling in household wealth

Question 25

What causes aggregate demand to rise?

Answer 25

• Depreciation of the exchange rate
• Cuts in direct and indirect taxes
• Increase in house prices
• Expansion of supply of credit + lower interest rates

Question 26

What are external shocks to aggegate demand?

Answer 26

• A large rise or fall in the value of the exchange rate
• A recession, slowdown or boom in one or more of a nation’s key trading partner countries
• A slump in the housing market
• An event that causes a fall in the supply of credit available to businesses and households
• A large change in commodity prices for a county that is a commodity exporter

Question 27

What are some factors affecting consumer spending (C)

Answer 27

• Real disposable income
• Employment and job security
• Household wealth
• Expectations and sentiment
• Market interest rates