T2.2 - Econ

Question 1

What is aggregate demand?

Answer 1

AD is the total level of planned real expenditure on goods and services produced within a country in a given time period

Question 2

Formula of AD

Answer 2

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

Question 3

Decrease in AD

Answer 3

1. Fall in net exports (M > X)
2. Cut in the real level of government spending
3. Higher interest rates/ fall in the supply of credit from the banking system
4. Decline in household wealth and confidence

Question 4

Increase in AD

Answer 4

1. Depreciation in the value of the exchange rate
2. Cuts in the rate of direct and indirect taxes
3. Increase in house prices and share prices
4. Expansion of supply of credit + lower interest rates

Question 5

External shocks:

Answer 5

1. A large rise or fall in the value of the exchange rate
2. A recession, slowdown or boom in nation’s key trading partner countries
3. A slump in the housing market/ construction sector of a country

Question 6

Factors that affect consumer spending

Answer 6

1. Real Disposable Income - i.e income adjusted for inflation & after direct taxes & benefits
2. Employment and Job Security - when the labour market is improving confidence and incomes improve
3. Household wealth - a rise in wealth can increase consumer demand
4. Expectations and Sentiment - economic uncertainty causes spending to fall, improving animal spirits will list demand

Question 7

Define debt financing

Answer 7

This means borrowing money from an outside source with the promise of paying back the loan, plus interest at a later date

Question 8

Key factors that affect household saving:

Answer 8

1. Real interest rate
2. Price expectations
3. Availability of credit
4. Unemployment/ Job security

Question 9

What is a simple economy?

Answer 9

A simple economy is one that no government and a closed economy is one that has no trade

Question 10

Define consumption

Answer 10

Consumption is spending on consumer/households goods & services

Question 11

Define Marginal propensity to consume

Answer 11

The proportion of additional income that is spent

Question 12

Importance of saving

Answer 12

1. Business survival
2. Funding investment
3. Buffer of financial resources for consumers

Question 13

What is investment?

Answer 13

Spending on capital goods including plant & machinery and infrastructure

Question 14

What is the difference between Gross & Net investment?

Answer 14

Gross investment is the total investment on new capital inputs whereas, net investment is gross investment adjusted for capital consumption (depreciation)

Question 15

Define current government spending

Answer 15

This involves recurring on providing public services including the pay of teachers and nurses

Question 16

Define Government spending

Answer 16

This is expenditure by a government on education, health care and other public services

Question 17

Factors affecting demand for exports

Answer 17

1. Real income
   
   • If domestic income is high, then demand for imports is likely to rise
2. Relative price of exports i work markets
   - This can be affected by domestic inflation, shipping/ transport costs, fluctuations in world commodity prices etc.