Learning Sequence 3 Macro

Question 1

Aggregate demand

Answer 1

Total spending in the economy at any given price

Question 2

What makes up aggregate demand (what makes the AD curve shift)

Answer 2

C+I+G+(X-M)
Consumption+investment+gov spending+net exports(experts-imports)
Acronym is just CIG xm

Question 3

Consumption

Answer 3

Consumer spending is the biggest part
If it increases, so does AD vice versa

Question 4

Investment

Answer 4

Spending done by businesses on capital goods
If investments increase, AD increases vice versa
Interest rates cause investments to decrease

Question 5

Government spending

Answer 5

Spending by the gov on providing goods and services
Spending on things such as roads schools
If spending increases, AD increases vice versa
If inflation is rising spending is decreased

Question 6

Net exports

Answer 6

Exports minus imports
If exchange rate appreciates, foreigners will would not want to buy goods, exports decrease, AD decreases
If exchange rate depreciates, foreigners would like to purchase foods, exports increase, AD increases

Question 7

What causes aggregate demand curve to move vs shift

Answer 7

Only price level causes movement, there is a shift by a change in any other variable.

Question 8

What does the aggregate demand graph look like

Answer 8

X - axis : real gdp
Y - axis : price level
As price level is high GDP is low

Question 9

A rise in price levels causes a fall in GDP reasons

Answer 9

Income effect and substitution effect

Question 10

Income effect

Answer 10

A rise in prices does not cause a rise in income, so this means that people have less real money or income to buy goods, this leads to a contraction in demand

Question 11

Substitution effect

Answer 11

If prices in UK rise, then exports will be more expensive for foreigners. This will lead to there being a decrease in exports. But the UK residents will also find those UK prices expensive, so they will start to import more goods, meaning that the imports will be greater than the exports. This will lead to a lower net export, leading to a contraction in demand in AD.
They will look for cheaper alternatives.

Question 12

What causes a movement along the AD curve

Answer 12

Inflation or deflation causes a change in price level.

Question 13

What causes a shift in the AD curve

Answer 13

A change in any other variable

Question 14

MPC

Answer 14

Marginal propensity to consume, the willingness of households to spend any extra income as they earn

Question 15

MPC formula

Answer 15

Change in consumption/change in income

Question 16

What kind of MPC do poorer people have

Answer 16

A higher one, as they are likely to spend more if their income increases whilst richer would save it

Question 17

APC

Answer 17

average propensity to consume, average amount spent on consumption out of the total income

Question 18

APC formula

Answer 18

Total consumption/total income

Question 19

MPS

Answer 19

Marginal propensity to save, increase in income that is not Spent but is saved.

Question 20

MPS formula

Answer 20

Change in savings/change in income

Question 21

APS

Answer 21

Average propensity to save, the amount that is saved not spent

Question 22

APS formula

Answer 22

Total savings/total income

Question 23

Influences on consumer spending

Answer 23

Interest rates - if increase, consumption decrease, bc u have to pay more
Consumer confidence - if they are confident about the future and expect pay rises, consumption increases, but if they aren’t confident and expect tax or rise, then decrease in consumption
Wealth effects - when people feel wealthier, they may increase spending, vice versa
Income - those with higher incomes save more than those with less, affects consumption
Tastes and attitudes - if people are more materialistic (buying the best and newest stuff), spending increases vice versa
IC WIT

Question 24

Factors that influence investment

Answer 24

economic growth - higher levels of investment if confident in economy growing
confidence - if they are confident about the future, investment increase vice versa
Demand for exports - if demand for exports increase, investment increases vice versa
Interest rates - high interest rates mean less investments
Government regulations - if gov encourages to invest by giving tax grants, investment increases
Access to credit - if there is a higher risk, less access to credit, Lower investments
Retained profit - if there is higher retained profit, investments increase vice versa
Tech change - if better tech, investments has more chances of succces, investment increases
Costs - if costs of raw materials is high, investment decreases

Question 25

Factors affecting gov spending

Answer 25

In recession, gov increases spending to increase demand, vice versa Level of gov spending relies of fiscal budget The more young and old, the higher the investment, I’m terms of schools for young and pensions for old

Question 26

Factors affecting net trade (exports -imports)

Answer 26

Real income - if income is high, more imports as people demand better products, net trade decreases Exchange rates - strong pound means imports are dearer, as foreigners pay more. This leads to imports increasing and exports decreasing, so net trade decreasing World economy - if UKs main export is doing well, net trade will increase Protectionism - if there is high protectionism for the UK, exports will decrease, as it is harder for the UK to export bc of tariffs.if uk imposed tariffs, others would retail iahte and exports will also decrease and imports Non-price factors - if UK goods are high in quality and quantity, exports will be high, as other countries would have a higher demand for thr goods. Trade will increase, Prices - high prices of goods means exports decrease and Imports would increase REWPNP