lesson 4

Question 1

when do we have a balance of payments deficit?

Answer 1

when we import more than we export

Question 2

when do we run a budget deficit?

Answer 2

when government spending exceeds taxation

Question 3

what is aggregate demand?

Answer 3

the total domestic demand in the economy/ the total demand for goods and services in and economy

Question 4

if AD is rising then the economy is…

Answer 4

growing

Question 5

if AD is decreasing then the economy is…

Answer 5

shrinking

Question 6

what are the four components of aggregate demand?

Answer 6

consumption
investment
government spending
net exports

Question 7

what is consumption?

Answer 7

the spending by consumers

Question 8

what is net exports?

Answer 8

exports minus imports

Question 9

what is the equation for aggregate demand?

Answer 9

AD=C+I+G+(X-M)
consumption + investment + government spending + (exports - imports)

Question 10

what are some reasons why aggregate demand may shift?

Answer 10

fall in interest rates
cut in direct tax
fall in exchange rates
advances in technology
inflationary expectations

Question 11

what is expansionary monetary policy?

Answer 11

when you increase the supply of money to increase economic growth

Question 12

what is gross investment?

Answer 12

the total value of all newly produced capital goods in a given time period

Question 13

what is depreciation?

Answer 13

when an assets value falls in a given time period

Question 14

what is net investment?

Answer 14

gross investment - depreciation

Question 15

what are investment decisions affected by?

Answer 15

availability of credit
cost of loans

Question 16

what does the multiplier explain?

Answer 16

that any injection will go around the circular flow more than once so any injection has a multiplied effect

Question 17

what does the ‘accelerator’ explain?

Answer 17

that when there is growth, businesses invest more as they enjoy sales and profits and since investment is a component of AD we get even more growth

growth creates profit meaning increased investment leading to more growth

Question 18

multiplier formulas

Answer 18

k= change in real GDP/ change in injections

k= 1/(1-MPC) = 1/MPS

Question 19

whats the largest component of AD?

Answer 19

consumption

Question 20

causes that would increase investment?

Answer 20

rising confidence
lower corporation tax
lower interest rates

Question 21

why is rising marginal propensity to consume considered to be a goods and a bad thing?

Answer 21

G: rising consumption means rising AD which would shift right which means falling unemployment

B: not saving means decrease in marginal propensity to save so people have less money to fall back on when they are out of work which leads to being poor at old age

Question 22

a reason why AD would decrease

Answer 22

increase in corporation tax

Question 23

a weird reason why we would see a rise in AD

Answer 23

a weakening pound

Question 24

why does a weakening pound cause a rise in AD?

Answer 24

it makes us more competitive