Theme 2 - The UK economy - Performance and Policies (2.2 - Aggregate Demand) Flashcards
Define Aggregate Demand [1]
Ref - 2.2.1 - The Characteristics of Aggregate Demand
The total of all demands and expenditures in the economy [1]
Describe what an aggregate demand curve is presented as [2]
2.2.1 - The Characteristics of Aggregate Demand
Price level on the x-axis and Real GDP on the y-axis [1]
The line slopes downwards, and is inversely proportional. [1]
What is the main reason for the aggregate demand curve sloping downwards? [2]
2.2.1 - The Characteristics of Aggregate Demand
An increase in the price level reduces the purchasing power of households and firms, [1] so this reduces the quantity demanded. [1]
What causes a movement along the aggregate demand curve? [1]
2.2.1 - The Characteristics of Aggregate Demand
A change in the price level [1]
What causes a shift in the aggregate demand curve? [1]
2.2.1 - The Characteristics of Aggregate Demand
Changes in the components of aggregate demand [1]
What is the formula used to calculate aggregate demand? [1]
Ref - 2.2.1 - The Characteristics of Aggregate Demand
AD = C + I + G + (X - M) [1]
State what each part of the aggregate demand formula shows [4]
Ref - 2.2.1 - The Characteristics of Aggregate Demand
C - Consumption [1]
I - Investment [1]
G - Government Spending [1]
(X - M) - (Exports - Imports) [1]
Define Consumption [1]
Ref - 2.2.2 - Consumption
Spending on consumer goods and services over a period of time [1]
Describe the difference between durable and non-durable goods [2]
Ref - 2.2.2 - Consumption
Durable goods continue to provide a stream of services over time [1]
Non-durable goods are used up over a short period of time [1]
Define disposable income [1]
Ref - 2.2.2 - Consumption
Household income which has been accounted for taxation. [1]
State the formula used to calculate the marginal propensity to consume [2]
Ref - 2.2.2 - Consumption
Change In Consumption [1]
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Change In Income [1]
State the formula used to calculate the marginal propensity to save [2]
Ref - 2.2.2 - Consumption
Change in savings [1]
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Change in income [1]
Describe the relationship between savings and consumption [3]
Ref - 2.2.2 - Consumption
Disposable income is either spent on consumption or saved [1] (Y = C+S), but rearrange for S (S = Y-C) [1] and S represents a proportion of income not spent. [1]
Explain 2 other factors which may determine consumption [4]
Ref - 2.2.2 - Consumption
Interest rates [1] - If the cost of borrowing money i high, less people will borrow from banks, so less consumption [1]
Wealth effect [1] - Increases in their asset prices increases consumer confidence, incentivising increased consumption. [1]
Define saving [1]
Ref - 2.2.2 - Consumption
A portion of a households income which is not spent [1]
Define Investment [1]
Ref - 2.2.3 - Investment
The purchase of capital goods which are used to create other goods and services [1]
What is the difference between gross and net investment? [2]
Ref - 2.2.3 - Investment
- Gross investment shows spending on capital goods before depreciation. [1]
- while net investment takes depreciation into account. [1]
Explain 2 factors which influence investment from firms and businesses [4]
Ref - 2.2.3 - Investment
Access to credit [1] - If banks are less willing to give out credit, there will be less money for businesses to invest [1]
Business Confidence [1] - Animal spirits shows the mood of a business. If there is little confidence in a business, they will feel less inclined to invest [1]
Describe the difference between physical and human capital [2]
Ref - 2.2.3 - Investment
Human capital - Investment in training/education of workers [1]
Physical captial - Investment in factories, offices etc. [1]
Describe the accelerator theory [2]
Ref - 2.2.3 - Investment
The accelerator theory states that investment increases, when the economy is at full capacity. [1] This is in order to continue economic growth once full capacity has been reached. [1]
State and explain 2 factors which may influence the effectiveness of the accelerator theory. [4]
Ref - 2.2.3 - Investment
Avaliability of credit. [1] - Influences the amount a firm can invest. [1]
Corporation tax. [1] - Influences how must profit is left over to reinvest. [1]
Define government expenditure [1]
Ref - 2.2.4 - Government expenditure
The total of all spending by local and national government [1]
Explain the 2 factors influencing government expenditure [4]
Ref - 2.2.4 - Government expenditure
Trade cycle - Automatic stabilizers reduces fluctuations in AD [1] by controlling the level of government spending during a boom/recession. [1]
Discretionary fiscal policy - Choosing when to incr./decr. gov. spending [1] to achieve macroeconomic objectives. [1]
Define Net Exports [1]
Ref - 2.2.5 - Net Trade
The value of exports minus the value of imports (X-M) [1]
Explain 2 factors which influence net exports [4]
Ref - 2.2.5 - Net Trade
Prices - The higher the price of a good, the lower the demand is [1] therefore the number of net imports decrease, which increases net exports [1]
Exchange rate - If UK currency increases in value, this means other countries will be less inclined to import from the UK [1] therefore net trade will decrease, so profits decrease [1]
Define the exchange rate [1]
Ref - 2.2.5 - Net Trade
The price of one currency in terms of another [1]
Describe the impact of a weaker exchange rate on net exports. [2]
Ref - 2.2.5 - Net Exports
- Imports will become more dearer [1]
- Exports will become more plentiful [1]
Explain 2 factors influencing net exports. [4]
Ref - 2.2.5 - Net Exports
- Inflation can increase costs for UK firms [1] so their products become less internationally competitive. [1]
- Non-price factors [1] - Things such as quality and reliability of a product can influence international demand. [1]
