MacroEconomics Aggregate Demand and Supply Mr. Jordan Flashcards
Define Disposable Income
Money that an individual receives after having paid any direct taxed ad received any transfer payments/benefits
Explain factors affecting consumption (2)
More consumer confidence leads to increase in spending
Increase in consumer income means they can spend more on goods/services
Having greater wealth, consumer confidence increases, leading to increase in consumption
Define Gross investment
Spending on capital goods before depreciation is taken into account
Define Net investment
Spending on capital goods after depreciation is taken into account
What does it mean if gross investment is lower than depreciation
Economy has less capital goods once depreciation is taken into account shifting PPF inwards
What does it mean if gross investment is higher than depreciation
Economy has more capital goods once depreciation is taken into account shifting PPF outwards
List factors affecting Investment
Lower corporation tax gives more profit after tax, increasing investment
Low interest rates make borrowing cheaper and reduces incentive to save
High demand for exports increases incentive to invest more to maximise profits
Define Government Expenditure (1)
Sum total of all spending by both local and national government (1)
Define Discretionary fiscal policy
government may decide to change the level of spending in the economy when they chance fiscal policy
Define Net Exports
Value of exports minus value of imports
(X-M)
List factors affecting Net exports
Non price factors include quality and design of product consumers may be more focused on than price
increased inflation increases cost for firms and makes them less competitive globally
Why does aggregate demand slope downwards (1)
At higher average prices interest rate is likely high so businesses invest less and consumers consume less (1)
What causes a movement in the AD Curve (1)
Change in Price level (called an expansion or contraction)
What causes a shift in the AD curve (1)
Components of AD (Consumption, investment, government spending, net exports)
Define Aggregate supply
Total of all goods and services produced in an economy each year
Define SRAS (1)
total planned output when price level can change but prices and productivity of factor inputs are the same (1)
What factors affect SRAS
Cost of production
Energy costs
Wage costs
Indirect taxation
What causes a movement along SRAS
Change in price level
What causes a shift in SRAS
Change in costs of production of firms (Change in oil prices)
Define LRAS
total planned output both prices and average wage rates can change
What is the Classical LRAS
There can be no gap between actual and potential output in long run so economy will always return to producing at its maximum potential level out output
What is the Keynesian
Markets do no clear so there can be spare capacity in an economy in long run
Define Sticky wages
employees’ pay doesn’t easily change in response to economic ups and downs
What reasons could there be for sticky wages in the economy
Employers want to avoid lowering wages to maintain employee attitude and productivity
Rapid wage adjustments could lead to dissatisfaction and conflict among workers
what does Keynesianism suggest policymakers should do in response to a recession?
Increase government spending and this injection encourages increase consumption/investment helping economy
List limitations of Keynesian policies
Takes time for government to recognize economic problems and put policies into affect
By the time those policies take affect economic conditions may have changed
What causes a movement along LRAS
Change in price level (following a change in AD)
What factors of productive cause a shift in LRAS
Increase in technological advances increases quality of capital increase productive potential
Increase in education/skill of workers increases quality of labour increasing productive potential
Define Equilibrium Real Nation Output
Planned aggregate demand equals aggregate supply
