Theme 2 Flashcards
Define Aggregate Demand
Total planned real expenditure on goods and services produced within a country in each period
Components of AD
• Household spending on goods and services (C)
• Investment Spending (I)
• Government Spending on Public Services (G)
• Exports of Goods and Services (X)
• (minus) Imports of Goods and Services (M)
Formula for AD
C+I+G+(X-M)
Why is the AD curve downwards sloping
Real income effect
As price level falls, real value of income rises and consumers can buy more of what they want
Factors leading to a fall in AD
Fall in net exports
Cut in government spending
High interest rates
Factors leading to a rise in AD
Depreciation in value of exchange rate
Cut in rate of taxes
Increase in house and share prices
Define marginal propensity to consume (MPC)
The change in spending following a change in income
Factors that affect consumer spending
Interest rates
Household wealth
Consumer confidence
Define disposable income
Income after taxes and benefits
Define gross investment
Total investment on new capital inputs
Define net investment
Gross investment adjusted for capital consumption (accounting for depreciation)
Factors influencing investment
Actual and expected demand for goods and services
The state of business confidence / pessimism
Business taxes – affecting post-tax returns on projects
Evaluation of high level of investment
+ Injection into circular flow of income
- Some capital goods may be imported - leakage from circular flow
Economic trade cycle
As GDP rises government will receive more tax revenue
Government less likely to spend whilst economy is expanding
What is Fiscal Policy
Use of government spending, taxation and government borrowing to affect level of growth of AD and output
What are the main influences on net trade balance
Real income
Exchange rates
State of world economy
Degree of protectionism
Non-price factors
Define aggregate supply
The quantity of goods and services that producers are willing and able to supply at a given level of prices in each period
Define short run AS
The relationship between planned national output (GDP) and the general price level
Causes of shifts in SRAS
Change in resource prices (energy, raw materials)
Business taxes and subsidies (VAT, scale of tax)
Changes in exchange rate
Define Long run aggregate supply
Represents the maximum possible output
Factors influencing LRAS
Technological advances
Changes in productivity
Changes in education and skills
How do technological advances influence LRAS
Provide more capital
Increase efficiency of FOP
How does increased production influence LRAS
Increased efficiency
How do education and skills influence LRAS
Each worker can produce more output
Raises productive capacity
