MACRO - LS3 - Aggregate Demand (Part 6)

Question 1

Determinants of government spending

Answer 1

• changes in political priorities
• changes in economic priorities - deliberate efforts to influence AD
• Trade cycle
• fiscal policy
• age distribution of popularion

Question 2

Change in political priorities

Answer 2

• governments have many expenditures - will increase/decrease in certain areas in response to its priorities

Question 3

Changes in economic priorities - deliberate efforts to influence AD

Answer 3

The gov can use its own spending as part of deliberate effort to influence AD
If increase spending it shifts to right

Question 4

Trade cycle

Answer 4

• Decisions over government expenditure may be made in order to manage AD, and therefore regulate the trade cycle
• In a recession, the government may increase spending in order to increase demand to reduce unemployment.
• Government spending also automatically rises during a recession as they have to spend more on unemployment benefits
• During booms, the government may decrease spending to decrease demand and reduce inflation

Question 5

Fiscal policy

Answer 5

• Some government spending is fixed from year to year, for example schools must be funded and pensions must be paid
• However, governments can vary what they spend each year, and this is set out in their budget
• Fiscal policy is the decisions about government spending and taxes and it will depend on the priorities of the government
• The level of government spending depends on what they lay out in their fiscal policy

Question 6

Age distribution of the population

Answer 6

• An ageing population leads to increased government expenditure on pensions, social care etc.
• whilst a young population leads to increased spending on education
• The more dependents in the economy (the young and old), the higher government spending tends to be

Question 7

Determinants of net trade

Answer 7

• changes in national income abroad
• changes in exchange rates
• changes in the level of trade protection
• non-price factors
• state of world economy

Question 8

Changes in national income abroad

Answer 8

• if Country B’s national income increases, it will import more from A - Exports increase
• AD increases in country A
• decreases in B

Question 9

Changes in exchange rates

Answer 9

If country A’s currency increases - more expensive relative to country B
So B imports less and A’s exports fall
A finds B’s imports cheaper so imports more
Country A’s AD falls

Question 10

Changes in level of trade protection

Answer 10

country B imposes restrictions on imports from A
A’s exports will falls - shift to left
B’s imports increase - shift to the right
Also countries are likely to retaliate
- Protectionism is an attempt to prevent domestic producers suffering from competition abroad
- Tariffs, quotas and technical barriers are introduced which makes it harder for producers from abroad to sell their goods in the UK.

Question 11

State of world economy

Answer 11

• If the UK’s main export country is doing well, then UK exports are likely to rise and so net trade is likely to rise
• The effect of the state of the world economy is dependent on which countries are doing well and the trade relationship the UK has with them

Question 12

Non-price factors

Answer 12

• Two non-price factors which affect net trade are quality and design and marketing
• If UK goods are of a higher quality and design, exports will be high as foreign demand for UK goods will increase and imports will decrease as people will buy the British goods instead of foreign goods
• This means net trade will increase
• If UK goods are well marketed, people will have a stronger desire to buy British goods so exports will increase and imports will decrease, so net trade will increase
• Strong quality/design and marketing will mean that British exports are likely to be more inelastic