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Economics A-level > M 2.2 Aggregate demand > Flashcards

M 2.2 Aggregate demand Flashcards

1
Q

What is aggregate demand?

A

total planned spending on real output produced in an economy

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2
Q

Formula for Ad?

A

AD = C + I + G + X - I

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3
Q

What are the five componants of aggregate demand?

A
  • consumption
  • investment
  • government spending
  • exports of goods and services
  • imports of goods and services
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4
Q

When does the AD curve shift upwards?

A

a rise in the price level causes a contraction of AD

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5
Q

What does the AD curve fall?

A

A fall in the price level causes an expansion of AD

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6
Q

Why does the AD curve slope downwards?

A
  • falling real incomes
  • balance of trade
  • interest rate effect
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7
Q

How do falling real incomes cause a downward sloping AD curve?

A
  • as price level rises the real value of income falls and consumers are less likely to buy what they want or need (real balance effect)
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8
Q

How does balance of trade cause a sloping AD curve?

A
  • persistant rise in the price level of Country X could make foreign produced goods and services cheaper causing a fall in exports and a rise in imports
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9
Q

How does the interest rate effect cuase a sloping downward AD curve?

A
  • if price level rises, this causes inflation and an increase in demand for money and a possible rise in interest rates on loans which deflationary effect oon consumer and business demand
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10
Q

What will an outward shift in AD curve cause?

A
  • will raise national output at all price levels
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11
Q

What will an inward shift in AD curve cause?

A

-will reduce national output at all price levels

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12
Q

What will cause a fall in AD?

A
  • cut in government spending
  • higher interest rates
  • decline in household wealth
  • increase in house prices
  • fall in exports
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13
Q

What will cause an increase in AD?

A
  • expansion of supply of credit
  • lower interest rates
  • depreciation of exchange rate
  • cuts in direct and indirect taxes
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14
Q

What is aggregate consumption?

A

spending by all the households in the economy on the consumer goods and services

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15
Q

What are the main sources of consumer incomes?

A

wages, savings, return from savings, pensions and benefits

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16
Q

What are the 8 factors determining consumption?

A
  • interest rate
  • current level of income
  • expected future income
  • wealth
  • levels of personal debt
  • consumer confidence
  • distribution of income
  • expectation of future inflation
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17
Q

How does interest rate determine consumption?

A
  • IR is the reward to savers for sacrificing current consumption. higher the interest rate the higher the reward. saving will increase as interest rate rises and level of consumption will fall
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18
Q

How does current level of income determine consumption?

A

as disposable income rises absolute consumption rises but consumption falls as a fraction of total income while fraction saved increases.

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19
Q

How does wealth determine consumption?

A
  • increase in house prices and shires cause homeowners and shareholders to consume more and save less partly because the wealth increase does their saving for them
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20
Q

How does expected future income effect consumption?

A
  • people plan savings and spending with a long term view of expected lifetime income.
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21
Q

How do levels of personal debt effect consumption?

A

if individuals have low levels of personal debt they will normally consume more as less disposable income is is diverted to repayments

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22
Q

How does consumer confidence effect consumption?

A
    • when consumer optimism increases households generally spend more and save less. often linked to employment prospects or job security
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23
Q

how does distribution of income effect consumption

A
  • rich people save a greater proportion of income then poor people, redistribution of income from rich to poor therfore increases consumption and reduces saving
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24
Q

When does saving occur?

A

when people decide to postpone their consumption until a future time

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25
Q

What is saving?

A

household disposable income that is not spent

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26
Q

What does a high savings ratio do?

A

lowers consumption and aggregate demand

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27
Q

What are the 8 factors affecting household saving?

A
  • real interest rate
  • price expectations
  • availability of credut
  • unemployment / job security
  • consumer confidence
  • taxation of savings
  • trust in savings institutions
  • need to pay back debt
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28
Q

What are the three macroeconomic reasons for saving?

A
  • business survival
  • funding investment
  • buffer for consumers
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29
Q

Why is business survival important for saving?

A
  • corporate savings provide a cushion during a recession

- business savings can be used as finance for takeovers and for capital investment projects

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30
Q

Why us funding investment important for saving?

A
  • banks need deposits from which they can lend

- savings lflow into pension funds - these can be reinvested into stock markets providing investment funds

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31
Q

Why is a buffer for consumers important to savings?

A
  • savings can smooth consumption during tough time
  • allow people to reduce debts
  • key source of retirement income
32
Q

What does the personal savings ratio measure?

A

the actual savin of the personal secotr as a ratio of total personal disposable income

33
Q

what is disposable income?

A

amount of money that households have available for spending and saving after income taxes have been acounted for

34
Q

Give formula for personal savings ratio?

A

actual personal savings / personal disposable income

35
Q

What is investment?

A

when people invest shares, bonds, properties or antiques

36
Q

What does imvestment in economic theory mean?

A

planned demand for capital goods which include both physical capital and human cpaital

37
Q

What type of concept is investment?

A

flow concept

38
Q

What type of concept is capital stock?

A

stock concept

39
Q

Differance between investment flow and national capital stock?

A

investment flow is measured over a period whereas natianal capital stock is measured at any particular time

40
Q

What are the two parts to gross investment?

A
  • replacement investment/ capital depreciation: maintain the size of the existing stock by replacing worn out capital
  • net investment: adds to capital stock
41
Q

What are the two types of investment in physical capital goods?

A
  • Investment in fixed capital (new factories, social capital, roads)
  • inventory investment in stocks of raw material, semi finished goods and finished goods
42
Q

Differance between savings and investment?

A
  • spending is income not spent on investment

- investment is spending by firms on capital goods such as machines and equipment

43
Q

Name 7 factors effecting investment?

A
  • expected future revenue
  • expected future COP
  • expected future profit
  • prices of capital and labour
  • nature of progress
  • supply of investment funds
  • government policies
44
Q

How do expected future profits affect investment ?

A
  • attributable to new investment project
45
Q

How do future COP effect investment?

A

affected by interest rate and future maintenance costs

46
Q

How do future profits effect investment?

A
  • make investment if prospect of profit is positve
47
Q

How do prices of labour and capital affect investment?

A

when price of capital rises, firms would substitute labour for capital and adopt more labour intensive methods of production , so investment falls

48
Q

How does the nature of technical progress effect investment

A
  • sudden burst of technical progress may cause firms to replace capital goods with machinary as its quicker
49
Q

What does accelerator refer to?

A

a change in investment is induced by a change in growth rate of national income or aggregate demand

50
Q

What does the accelerator effect stae?

A

investment levels are related the rate of change of GDP

51
Q

What is the assumption of the accelerator theory?

A

firms wish to keep the capital - output ratio fixed

52
Q

Explain accelerator theory?

A
  • if firms see GDP and AD rising, they will use existing capacity and capital and labour force work harder to meed demand
  • firm will eventually reach full capacity and will invest in capital equipment to meet future anticipated demand
53
Q

What is the consequence of the accelerator effect?

A

investment in capital goods is a more volatile componant of aggregate demand then consumption. increase in rate of economic growth will cause larger increase in level of investment

54
Q

If growth rate of output accelerates what happens?

A

investment increases

55
Q

When will the accelerator effect be high?

A
  • rate of change of consumer income and spending is strongly positve
  • amount of spare productive capacity for businesses is low
  • available supply of investment funds is high
56
Q

4 macroeconomic advantages of a higher level of investment

-

A
  • injection into circular flow of income
  • new capital can boost productivity and creates additional capacity to supply
  • creates extra demand in investment goods industries and can lead to strong multiplier effects on level of GDP
  • will boost countries competativeness and therefore improve trade balance
57
Q

What is government spending?

A

spending on state-provied goods and services including public goods and merit goods

58
Q

How can the government finance spending?

A

tax revenue and borrowing

59
Q

What is the amount the government borrows a year called?

A

budget deficit

60
Q

How is the net trade balance measured?

A

value of exported goods and services - value of imported products

61
Q

Factors effecting net export?

A
  • UK productivity ( if more productive then more competative)
  • exchange rates ( strong pound makes exports less competative)
  • economic growth in other countries ( in key export markets)
  • extent of free trade ( as trade broadens, new export opportunity)
62
Q

What is the multiplier effect?

A

a change in one of the componants of AD can lead to a multiplied final change in the equilibrium level of GDP and national income

63
Q

Equation for the multiplier?

A

change in initial injection / change in in real national income

64
Q

what are the factors effecting the multiplier effect?

A
  • interest rates (high interest, consumption may not rise significantly)
  • tax rates ( tax is high, spending + consumption is low)
  • imports
  • spare capacity
65
Q

WHat is the UK national debt ? define

A

the total amount of money the British government owes to the private sector and other purchasers of UK gilts

66
Q

Explain the process of the mulitplier effect?

A
  • new house builidng project injects 200million of extra demand and output into economy
  • many businesses benefit directly including building supply industries and architects
  • constructing new houses generates a new flow of factor incomes - including wages and profits
  • if the extra income stays inside circulr flow the multiplier effect is likely to be strong and the resultant impact on GDP is large
67
Q

What is the negative multiplier?

A

multiplier effect happening in reverse, a withdrawal from the economy

68
Q

What will lead to a negtive multiplier and a fall in GDP?

A

cuts in spending and increases in taxes

69
Q

What does the size of the multiplier depend on?

A

the marginal propensity to consume

70
Q

IF an individual has a high MPC what is the effect?

A

higher value of multiplier

71
Q

IF a individual has a higher MPS what will the multiplier be?

A

low

72
Q

What is the marginal propensity to consume?

A

the change in consumer spending arising from a change in disposable income

73
Q

Calculation for MPC?

A

change in consumption / change in disposable income

74
Q

What is the formula for average propensity to consume?

A

consumption / income

75
Q

What four factors determine MPC?

A
  • income levels ( higher income, higher MPC)
  • nature of income change (if people get a bonus, more likely to save, however if they get a pay rise they will have higher consumption)
  • interest rates ( high interest rate encourages saving, low consumption)
  • consumer confidence (high confidence, high consumption)

Economics A-level (35 decks)

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