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A-level economics > macro AD & AS > Flashcards

macro AD & AS Flashcards

1
Q

what is the equation for aggregate demand

A

AD = C+I+G+(X-M)

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2
Q

In the aggregate demand curve what does the wealth effect describe and how does it effect graph movement

A

as the price level decreases the purchasing power of income now increases as people are richer therefor more likely to spend money on goods and services

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3
Q

what does it mean if the aggregate demand curve is downwards sloping?

A

means that aggregate demand is changing purely for reasons to do with the price level changing

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4
Q

In the aggregate demand curve what does the trade effect have on the graph/slope

A

as the price level decreases exports become more competitive and imports. This will therefore increase net exports, causing the slope to go downwards

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5
Q

in the aggregate demand curve what does the interest effect have on the graph/slope

A

as price level decreases interest rates can be kept lower in the economy, this in turn will increase more consumption, investment, and reduces the value of exchange rate boosting net exports. Changes to the price level purely will cause the slope to face downwards

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6
Q

when does the AD graph contract

A

when price level increases as a result of (wealth, trade or interest effects) which only effect the y-axis

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7
Q

when does an extension in AD curve occur

A

when the price level decreases (which will then increase AD equation factors)

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8
Q

when does the AD curve slope downwards

A

occurs purely based on changes in factors effecting price level , this will therefor increase of decrease real GDP

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9
Q

what happens when withdrawals are equal to injections

A

national income is =

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10
Q

what happens when withdrawals exceeds injections

A

national income is lower

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11
Q

what happens when injections exceed leakages

A

national income will increase

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12
Q

what is aggregate demand

A

total demand for a country’s goods and services at a given price level in a given period of time

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13
Q

what is the equation for aggregate demand

A

AD = C + I + G + (X-M)

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14
Q

what is disposable income

A

income minus taxes

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15
Q

what are two influences of consumption (simple statements)

A

.disposable income
.rate of interest

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16
Q

what is GDP

A

-gross domestic product
-total level of economic activity carried out in an economy during a given period

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17
Q

how is GDP measured

A

-average of total income
-total expenditure
-total output

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18
Q

what does total income show

A

the ways in which households earn income (balance between rewards to, labour, capital, land..)

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19
Q

what does total national expenditure show

A

how resources are being used, what proportion is used in consumption and what in investment

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20
Q

what does national output show

A

the total value of final goods and services produced by a country’s economy

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21
Q

what does consumption function mean

A

the relationship between consumer expenditure and diposable income

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22
Q

what is the relationship between income and consumption

A

income is one of the main factors that determine consumption
increase in disposable income will result in increase in consumption

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23
Q

define investment

A

spending on capital goods by firms

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24
Q

what is the rate of interest

A

cost for borrowing and reward for lending

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25
Q

what are 5 factors that will effect net exports

A

.increase or decrease in income abroad
.increase or decrease in income at home
.exchange rate
.relative prices
.security

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26
Q

what are the 4 types of government spending

A

current spending
capital spending
welfare spending
debt interest

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27
Q

what is current government spending

A

spending on maintenance of key public services and public sector wages

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28
Q

what is capital spending

A

spending infrastructure projects

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29
Q

what are two determinates of net exports

A

real disposable income earned abroad
real disposable income earned at home

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30
Q

how does increase in real disposable income abroad effect Uk exports

A

if income for folks abroad increase the marginal propensity to import goods from the UK (our exports) will increase

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31
Q

how does decrease in real disposable income abroad effect UK exports

A

if there is a resession abroad the marginal propensity for them to import UK goods will decrease

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32
Q

what are the 6 determinates of investment
(IBCSCC)

A

interest rates
business confidence
corporation tax
spare capacity
competition level
capital price

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33
Q

what are the three withdrawals into the circular flow

A

savings
taxes
imports

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34
Q

what are the three injections in the circular flow

A

exports
investment
government spending

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35
Q

what will happen if injections exceed withdrawals

A

circular flow will expand (and so national income will rise)

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36
Q

what happens if leakages exceed injections

A

.circular flow will shrink (so national income will fall)

37
Q

what do owners of firms receive and what is it a payment for (as they are apart of a household)

A

they receive profit for enterprise

38
Q

what actually is MPC how is it calculated

A

.represents the amount of each extra pound that the consumer spends when given an extra pound in income

.it is change in consumption/change in income

39
Q

will MPC for people of low income/ poorer countries be higher or lower

A

higher MPC’s

40
Q

how is MPS calculated

A

change in savengs/change in income

41
Q

what does MPS represent

A

amount of each extra pound that the consumer saves when given an extra pound in income

42
Q

how is MPT calculated

A

change in tax paid/change in income

43
Q

what does MPT represent

A

the amount of each extra pound earned that is spent paying taxes

44
Q

how is MPM calculated and what does it show

A

.change in imports purchased/change in income

.for every extra £1 of income MPM is the proportion of that £1 spent on imported goods

45
Q

what will change in price do to AD curve (briefly)

A

cause a movement along the curve

46
Q

what is a demand-side shock

A

anything (positive or negative) that causes AD to change

47
Q

example of negative demand-side shocks

A

-rise in interest rates
-rise in taxation
-fall in real GDP (have a knock on effect on confidence)

48
Q

what is the relationship between average price level and aggregate demand

A

inverse

49
Q

6 factors effecting consumption on AD graph

A

-wealth levels
-income levels
-animal spirits (consumer
confidence)
-future inflation expectations
-unemployment levels
-job security

50
Q

what are the two different types of investment and explain them

A

-physical capital (machinery ect…)
-human capital (spending on skills of workers, training programmes ect…)

51
Q

5 factors that may effect levels of investment

A

-interest rates
-future growth and demand
-profitability
-government policies (corporate tax, subsidies)
-efficiency of financial system

52
Q

what are the two

A
53
Q

what is the shape of the AD curve

A

downward sloping

54
Q

what are 4 determinants of consumer spending

A

-interest rates
-consumer confidence for the future
-wealth effect
-inflation expectations
-income

55
Q

what is the term used to explain why firms will be overoptimistic and invest excessively in good times

A

animal spirits

56
Q

what in general is fiscal policy

A

involves changing government spending and taxation according to economic conditions

57
Q

expansionary fiscal policy can increase, consumption, investment and government purchases, how?

A

-increase in consumption by increasing disposable income due to tax cuts
-increase investment by cutting business taxes
-increase gov purchases because government spending rises

58
Q

how does expansionary fiscal policy effect the AD curve

A

shifts AD curve right as AD has increased

59
Q

how does contractionary fiscal policy effect the AD curve

A

shifts the AD curve leftwards as AD has fallen

60
Q

what 3 aspects of AD are decreased by contractionary fiscal policy

A

consumption
investment
government spending

61
Q

how is government spending impacted during an economic boom

A

there is more spending and higher incomes

this means government receives more tax

and pay less benefits

62
Q

what is spare capacity

A

how much spare

63
Q

4 factors that influence net trade

A

-protectionism
-exchange rates (WIDEC SPICE)
-relative income (domestic and abroad)
-inflation rates
-spare capacity

64
Q

what three factors can cause SRAS to shift

A

-Business costs (labour and raw material costs)
-exchange rates (may lead to higher import prices)
-government increasing taxes (increase cost of production)

65
Q

what will cause a movement in the SRAS

A

a change in the average price level

66
Q

what are the 3 differences between LRAS and SRAS

A

-in the short run at least one of the FOP are fixed
-in the long run all FOP are variable
-in the long run the economy is operating at full employment

67
Q

what is a supply side shock

A

anything (positive or negative) that causes SRAS to change

68
Q

what will a rise in global oil prices result in terms of SRAS

A

will cause shift left as imported costs of production rise

69
Q

In terms of SRAS a bad harvest, technological improvement or a new mineral discovery are all regarded as…?

A

a supply-side shock

70
Q

what is SRAS, what is the shape of the SRAS curve and why

A

-curve shows the total quantity firms will produce at each price level

-SRAS is upwards sloping

-as it shows how suppliers will react to a higher price level for final outputs of goods and services holding inputs constant

71
Q

what shape is Keynesian LRAS

A

curves upwards

72
Q

in detail describe the different points along the Keynesian LRAS at:
-bottom/low quantities of output
-moving closer towards the curve/as output rises
-moving towards Yfull

A

-At low quantities of output
.lots of spare capacity
.increases in output use up this spare capacity and they are not inflationary
.unemployed workers are hired and unused factors of production are used

-As output rises
.supply starts becoming a limiting factor
.there could be labour shortages, capital shortages or a shortage in raw materials this is inflationary but not impossible to increase output

-at Yfull all FOP are being used this is full output

73
Q

labelled axis on LRAS graphs?

A

y=price level
x=real national output

74
Q

what can shift the classical LRAS curve

A

an increase in the amount or quality of each FOP

75
Q

factors effecting classical LRAS model

A

technology
infrastructure
enterprise
cultural attitudes
factor mobility
economic incentives

76
Q

what are price level rises known as

A

inflation

77
Q

define multiplier effect

A

number used to multiply a change in injection or leakage that leads to a greater final change in real national income

78
Q

what happens to the multiplier in the economy if the MPW increases

A

it is reduced

79
Q
A
80
Q

the multiplier effect would be greater in an economy with no imports? true or false

A

true

81
Q

what type of economy have the largest multiplier and why

A

-larger in closed or at least less open economies
-because injections into the circular flow stayed in the economy

82
Q

the UK economy grew in the decade after 2008, but why might the trend of weak consumer expenditure have persisted

A
83
Q

UK government has taken many steps to increase tax-free allowance of annual income since 2010. Why might tax giveaways make more economic sense when directed at the poorest

A

.many economists argue that people who earn less have higher MPC’s

.if the government is to give a take break of 100million, they will find this multiplies into higher GDP if granted to those on lower income

.(most likely because the richest would use the same tax break to accumulate more wealth not inject it back into the economy)

84
Q

inflation expectations effect consumer spending, what are inflation expectations?

A

.if prices are going to rise in future people spend more now and save less
.this raises consumer spending as savings represent forgone consumption

85
Q

name three leakages from circular flow

A

-save
-tax
-import

85
Q

evaluate impact of increased inflation on consumption

A

“Assuming all other factors affecting consumption remain constant (ceteris paribus), an increase in inflation would…”

85
Q
A
86
Q

describe three reasons why consumer expenditure in an economy might be relatively low (3 points 6 marks)

A

1) interest rates are a factor effecting consumer expenditure. If interest rates are high people are more willing to save their income that they would have spent, this decreases consumer expenditure

2) consumer expenditure is also impacted by taxation. If the government increase taxation on income, consumers will have less disposable income they are willing to spend and therefore consumer spending will decrease

87
Q
A

A-level economics (6 decks)

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