topic 11 - theme 2 Flashcards
aggregate demand
what does protectionism mean?
government uses tariffs or quotas to protect domestic industries
what is the aggregate demand formula?
AD = C + I + G + (X - M)
what does the C stand for in the aggregate demand formula?
consumers
- what households spend
what does I stand for in the aggregate demand formula?
business spending/investment
what does the G stand for in the aggregate demand formula?
government spending
- trade
what does the X stand for in the aggregate demand formula?
exports
what does the M stand for in the aggregate demand formula?
imports
what does aggregate demand mean?
the total amount of spending on goods and services produced in an economy during a period of time
what does consumption mean?
total planned household spending on domestically produced goods and services
what does disposable income mean?
the income that households have available for consumption, imports or saving after direct taxes and transfer payments
what does discretionary income mean?
the amount of an individual’s income that is left for spending, investing or saving after paying taxes and paying for personal necessities
what are the main factors that influence consumption?
- disposable income
- the base rate/interest rates in general
- consumer confidence
- changes to tax or transfer payments
what does base rate mean?
the interest rate the Bank of England charges other banks and other lenders when they borrow money
what does the average propensity to consume mean?
the proportion of income that households devote to consumption
what does propensity mean?
the tendency to do something
what does the marginal propensity to consume (MPC) mean?
the proportion of additional income devoted to consumption
what does marginal propensity to save (MPS) mean?
the proportion of an increase in disposable income that households would devote to saving
what does marginal mean?
if households earns one more pound, what proportion of this would be consumption or saving
how to calculate the average propensity to consume (APC)?
C/Y
- C = consumption
- Y = income
how to calculate the marginal propensity to consume (MPC)?
change in C / change in Y
- C= consumption
- Y = income
what are the 3 leakages?
- savings
- tax
- imports
what does the permanent income hypothesis suggest influences consumption?
it is not only the current disposable income level but expected future income that may influence current consumption levels
what is another factor that influences consumption?
- wealth
- rising house prices
what does wealth mean?
what we own
- consumption patterns are much higher due to expectations being fulfilled
what does income mean?
money we get coming in/make
what does a rise in house prices lead to?
a rise in consumption in general
how does the base rate/ interest rates in general influence consumption?
if interest rates go down, people have more disposable income
- may be a disincentive to save
what happens if the base rate increase? (essential)
consumption decreases
why might there be a time-lag to a base rate change?
it takes time to filter through
- takes time to change spending patterns
what is the consumption function?
the relationship between consumption and disposable income
- its position depends on other factors that affect how much households spend on consumption
what does an increase in disposable income lead to?
an increase in consumption
what does investment mean?
expenditure undertaken by firms on capital goods produced within the economy
what does replacement investment mean?
the replacement of obsolete or aging capital
what are examples of investment?
- IT equipment
- vehicles
- buildings
what are the influences on investment?
- business confidence
- base rate/interest rate in general
- availability of credit
- government macroeconomic and microeconomic policy
- inflation
- animal spirits
what does business confidence mean?
the forward-looking expectations of firms
- determined by a survey
why does base rate/interest rates in general influence investment?
as people will be reluctant to borrow if interest rates go up
how does government macroeconomic policy influence investment?
stabilises the economy
examples:
- fiscal policy
- monetary policy
how does government microeconomic policy influence investment?
improves efficiency
examples:
- subsidies
- price control
- taxation
- regulation
- competition
- policy
what does animal spirits mean?
the ways that human emotion can drive financial decision-making in uncertain environments and volatile times
- account for the role of emotion and herd mentality in investing
- used to help explain why people behave irrationally
what is the investment demand function?
downward sloping as generally if the rate of interest in an economy falls, this encourages investment
what is the result of the shift of the investment demand function?
an improvement in business confidence
what can government spending be regarded as?
partly autonomous; independent of the same variables that influence consumption and investment
- policy
- ideology driven meeting commitments
- views on taxing and spending
what is policy towards spending largely influenced by?
the political party in power
- reactive rather than proactive (e.g covid)
- uncontrollable (overseas events)
what may political cycles encourage?
government spending when an election is imminent
- pork barrelling/electoral expendiency
why does the government generally act on its own accord?
political expendiency
what are the two types of monetary policy?
- expansionary
- tight
what is expansionary monetary policy?
cutting interest rates to make borrowing cheaper and boost spending
- aims to increase rate of economic growth
what is tight monetary policy?
raising interest rates to make borrowing more expensive and reduce spending snd inflationary pressures
what are the two fiscal policy’s?
- expansionary
- tight
what is expansionary fiscal policy?
higher levels of spending and/or lower tax rates
- aim is to increase aggregate demand in a depressed economy
what is tight fiscal policy?
government spending cuts and/or tax rises
- aims to decrease inflationary pressure or decrease the budget deficit —> can cause lower economic growth
what policies can be used to overcome market failure?
- tax
- subsidies
- laws and regulations
- pollution permits
- advertising
- nudges
- government price controls
- changes in property rights
- policies to reduce unemployment
- labour market regulation
what are trade in goods and services influenced by?
- CID and DEC
- Brexit or any type of trade deal or barrier to trade
- attitudes to (an acceptance of) international trade
- tariffs and quotas
- costs of transportation and ease of communication
- globalisations
what does CID and DEC impact?
exchange rate on costs and demand of imports and exports
what do tariffs mean?
tax on imports
- government uses tariffs to impose effects on goods
what do quotas do?
limit what comes in as imports
what do costs of transportation effect?
cost of goods
what does globalisation mean?
growing independence of the world’s economics, culture and populations
- brought about by cross-border trade in goods and services, tech and flows if investment
what are the pros if globalisation?
- access to new markets
- spread knowledge and tech
- enhanced global cooperation and tolerance
- promotes economic growth
what are the cons if globalisation?
- increases competition
- exploitation of labour and resources
- imbalanced trade
- domestic job losses
what does an aggregate demand curve show?
total planned domestic expenditure at any given possible overall price level
- shows overall demand in an economy
