lesson 4 Flashcards
when do we have a balance of payments deficit?
when we import more than we export
when do we run a budget deficit?
when government spending exceeds taxation
what is aggregate demand?
the total domestic demand in the economy/ the total demand for goods and services in and economy
if AD is rising then the economy is…
growing
if AD is decreasing then the economy is…
shrinking
what are the four components of aggregate demand?
consumption
investment
government spending
net exports
what is consumption?
the spending by consumers
what is net exports?
exports minus imports
what is the equation for aggregate demand?
AD=C+I+G+(X-M)
consumption + investment + government spending + (exports - imports)
what are some reasons why aggregate demand may shift?
fall in interest rates
cut in direct tax
fall in exchange rates
advances in technology
inflationary expectations
what is expansionary monetary policy?
when you increase the supply of money to increase economic growth
what is gross investment?
the total value of all newly produced capital goods in a given time period
what is depreciation?
when an assets value falls in a given time period
what is net investment?
gross investment - depreciation
what are investment decisions affected by?
availability of credit
cost of loans
what does the multiplier explain?
that any injection will go around the circular flow more than once so any injection has a multiplied effect
what does the ‘accelerator’ explain?
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
multiplier formulas
k= change in real GDP/ change in injections
k= 1/(1-MPC) = 1/MPS
whats the largest component of AD?
consumption
causes that would increase investment?
rising confidence
lower corporation tax
lower interest rates
why is rising marginal propensity to consume considered to be a goods and a bad thing?
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
a reason why AD would decrease
increase in corporation tax
a weird reason why we would see a rise in AD
a weakening pound
why does a weakening pound cause a rise in AD?
it makes us more competitive
