MacroEconomics Aggregate Demand and Supply Mr. Jordan

Question 1

Define Disposable Income

Answer 1

Money that an individual receives after having paid any direct taxed ad received any transfer payments/benefits

Question 2

Explain factors affecting consumption (2)

Answer 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

Question 3

Define Gross investment

Answer 3

Spending on capital goods before depreciation is taken into account

Question 4

Define Net investment

Answer 4

Spending on capital goods after depreciation is taken into account

Question 5

What does it mean if gross investment is lower than depreciation

Answer 5

Economy has less capital goods once depreciation is taken into account shifting PPF inwards

Question 6

What does it mean if gross investment is higher than depreciation

Answer 6

Economy has more capital goods once depreciation is taken into account shifting PPF outwards

Question 7

List factors affecting Investment

Answer 7

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

Question 8

Define Government Expenditure (1)

Answer 8

Sum total of all spending by both local and national government (1)

Question 9

Define Discretionary fiscal policy

Answer 9

government may decide to change the level of spending in the economy when they chance fiscal policy

Question 10

Define Net Exports

Answer 10

Value of exports minus value of imports

(X-M)

Question 11

List factors affecting Net exports

Answer 11

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

Question 12

Why does aggregate demand slope downwards (1)

Answer 12

At higher average prices interest rate is likely high so businesses invest less and consumers consume less (1)

Question 13

What causes a movement in the AD Curve (1)

Answer 13

Change in Price level (called an expansion or contraction)

Question 14

What causes a shift in the AD curve (1)

Answer 14

Components of AD (Consumption, investment, government spending, net exports)

Question 15

Define Aggregate supply

Answer 15

Total of all goods and services produced in an economy each year

Question 16

Define SRAS (1)

Answer 16

total planned output when price level can change but prices and productivity of factor inputs are the same (1)

Question 17

What factors affect SRAS

Answer 17

Cost of production

Energy costs
Wage costs
Indirect taxation

Question 18

What causes a movement along SRAS

Answer 18

Change in price level

Question 19

What causes a shift in SRAS

Answer 19

Change in costs of production of firms (Change in oil prices)

Question 21

Define LRAS

Answer 21

total planned output both prices and average wage rates can change

Question 22

What is the Classical LRAS

Answer 22

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

Question 23

What is the Keynesian

Answer 23

Markets do no clear so there can be spare capacity in an economy in long run

Question 24

Define Sticky wages

Answer 24

employees’ pay doesn’t easily change in response to economic ups and downs

Question 25

What reasons could there be for sticky wages in the economy

Answer 25

Employers want to avoid lowering wages to maintain employee attitude and productivity

Rapid wage adjustments could lead to dissatisfaction and conflict among workers

Question 26

what does Keynesianism suggest policymakers should do in response to a recession?

Answer 26

Increase government spending and this injection encourages increase consumption/investment helping economy

Question 27

List limitations of Keynesian policies

Answer 27

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

Question 28

What causes a movement along LRAS

Answer 28

Change in price level (following a change in AD)

Question 29

What factors of productive cause a shift in LRAS

Answer 29

Increase in technological advances increases quality of capital increase productive potential

Increase in education/skill of workers increases quality of labour increasing productive potential

Question 30

Define Equilibrium Real Nation Output

Answer 30

Planned aggregate demand equals aggregate supply