key terms week 2 econ

Question 1

Aggregate demand

Answer 1

C+I+G+(X-M)

Question 2

AD

Answer 2

Total expenditure in the economy

Question 3

Consumption

Answer 3

household expenditure on goods and services

Question 4

Investment

Answer 4

Expenditure by firms on capital goods

Question 5

Govt spending

Answer 5

injection into the circular flow - schools/hospitals

Question 6

Exports

Answer 6

injection into the circular flow - other countries expenditure on our goods and services

Question 7

Imports

Answer 7

Leakage from the circular flow - domestic expenditure on foreign goods and services

Question 8

Disposable income/employment rates

Answer 8

when disposable incomes rise households are more able to spend on goods and services. If unemployment rates are low disposable income is likely to rise. This enables households to spend more. Therefore consumption rises.

Question 9

Taxation

Answer 9

If income taxes fall households have more disposable income. This enables households to spend more and it may increase the average propensity to consume.

Question 10

Inflation expectations

Answer 10

if households expect prices to rise in the future, they will rationally spend more in the SR to avoid paying higher prices. If inflation is unexpected and volatile, households will be more likely to save.

Question 11

Interest rates

Answer 11

cost of borrowing and the reward for saving - if interest rates rise the cost of borrowing will increase but borrowing will fall. Mortgage repayments will increase this will reduce disposable income which will reduce household expenditure. Higher interest rates will increase the reward for saving which will reduce household expenditure.