Macroeconomics Booklet 2 Flashcards
What is aggregate demand?
This is the total planned spending on the output produced in an economy.
What 4 components is it made up of?
1) Consumption
2) Investment
3) Government spending
4) Net exports
What is the formula for aggregate demand?
AD = Consumption + Investment + Government spending + (Exports - Imports)
What is consumer spending?
Act of using disposable income for the consumption of goods and services- Represents 2/3 of G.D.P
What 3 areas is consumer spending divided into?
1) Consumer durables - household items
2) Consumer non-durables - food etc
3) Services
Give 3 examples of what are the influences on consumer spending.
1) Tax
2) Population
3) Unemployment
What will increases in income mean?
This enables consumers to buy a greater quantity of luxury goods that are expensive.
In the UK, who sets out the base rate of interest?
Back of England, via the Monetary Policy Committee.
What is the base rate in the UK?
5.25%
What are the interest payments affecting consumers?
1) Savings - Increase in savings, consumption decreases.
2) Variable mortgage rates become more expensive, disposable income decreases.
3) Loans - Interest rates are high, credits more expensive.
4) Credit
What is consumer confidence?
This means the more confident consumers are, the more willing they are to spend their income and take on debt.
What factors will influence consumer confidence?
1) Neo-classical view - consumers act as rational utility maximisers. Factors such as job security, unemployment rates and wages determine macroeconomics.
2) Keynesian view - consumers are reactionary. Actions determined by ‘animal spirits’.
What does marginal mean?
Additional outcome - producing are consuming one additional unit.
What does propensity mean?
What consumers tend to do.
What is the multiplier effect?
Initial amount spend is multiplied in the economy.
What is investment?
Spending to fix old capital and spending on new capital.
What are some determinants of Investment in Fixed Capital?
1) Market growth
2) Tax
3) Price of labour
4) Interest rates
What is the accelerator effect?
Initial increase in AD - Firms need more capital to produce additional output - firms invest more - AD increases again.
What are some positives of Government spending?
Resolve poverty/ unemployment, increase in AD
What are some negatives of Government spending?
Excessive dept, inflation and an increase in tax rates.
PPF illustrating economic growth?
Whole curve shifts outwards - long run economic growth.
What is included in the business cycle?
1) Boom
2) Recession
3) Slump
4) Recovery/growth
5) Boom
What is a general glut?
Too much of something.
What is the short run?
The time period in which at least one factor of production is fixed in quantity.
What is the long run?
This is where all factors of production are variable.
What does the LRAS look like neo-classical?
Perfectly price inelastic line.
What shifts the LRAS?
1) Quantity (Increased in the size of labour force)
2) Quality (Education and training)
3) Technological change (New technology)
LRAS Keynesian model?
Curve that shifts to perfectly price inelastic.
