Theme 2: Aggregate Demand Flashcards
Can you describe to me what 3 things does an aggregate demand curve have?
- Downward sloping line on a graph
- Price Level on the Y-axis
- Real GDP on the X-axis
Can you describe to me what 3 things does an aggregate demand curve have?
- Downward sloping line on a graph
- Price on the Y-axis
- Quantity on the X-axis
When should you draw a Demand curve, and when should you draw an Aggregate Demand curve?
-Draw a demand curve when you’re referring to just one specific good.
- Draw an aggregate demand curve when you’re referring to an entire economy.
State the aggregate demand formula
AD = C + I + G + (X - M)
What does C stand for?
Consumption
What does I stand for?
Investment
What does G stand for?
Government spending
What does (X - M) Stand for?
Net trade (X = exports, M = imports)
What is the formula for Net investment?
Net investment = Gross investment - Depreciation
How does income affect AD
Lower incomes = AD shifts left
Higher incomes = AD shifts righ
What is the multiplier effect?
when an initial increase in an injection leads to a much bigger, overall effect on the economy.
What is disposable income?
Income - Taxes
Why do interest rates effect investment?
Investment increases as interest rates fall. As the cost of borrowing is less and the return to lending is higher.
Why does influence of government and regulations effect investment?
The rate of corporation tax could affect investment. Lower taxes means firms keep more profits, which could encourage investment.
The ………… is when economic growth is fast, and it could be inflationary or unsustainable.
boom
During ……………., there real output in the economy falls, and there is negative economic growth
recessions
The economy goes through periods of booms and ………..
busts
Fiscal policy
Government policy that attempts to manage the economy by controlling taxing and spending.
How does fiscal policy work?
demand side policy.
Expansionary fiscal policy
During periods of economic decline, the government might increasing spending and boost AD or reducing taxes.
Contractonary Fiscal Policy
During periods of economic growth governments might decrease expenditure on purchases and also might increase taxes which reduces the size of the government budget deficit.
What are the main influences on the net trade balances?
Real income, exchange rates, state of the world economy, degree of protectionism and non-price factors.
How does real income influence net trade balances?
During periods of economic growth consumers can afford more and therefore import more which is a deficit on the current account.
How do exchange rates influence net trade balances?
Depreciation means imports become more expensive and exports are cheaper.
How does the state of the world economy influence net trade balances?
Decline in economic growth in one of the countries export markets means there will be a fall in exports. As consumer spending in those economies will fall.
How does degree of protectionism influence net trade balances?
Protectionist methods cause the trade deficit to reduce as the UK will be importing less due to tariffs and quotas on imports in the UK. However if it leads to retaliation exports might decrease too.
How do non-price factors influence net trade balances?
The competitiveness of a countries goods and services influenced by supply side policies impacts how many exports a country has. A country can be more competitive by being innovative etc.
