Y1 - AD/AS

Question 1

Define aggregate demand

Answer 1

The total planned expenditure on goods and services in the UK (C+I+G+X-M)

Question 2

Define aggregate supply

Answer 2

The total planned output of goods and services in the UK

Question 3

What is consumption?

Answer 3

• Main component of AD
• Measures the amount consumers wish to spend at various price levels rather than save
• More disposable income = more spending

Question 4

Define gross investment

Answer 4

The total amount of investment before any account is taken of depreciation of assets (e.g. capital loses value as it wears out or become less efficient)

Question 5

Define net investment

Answer 5

Takes into account the fall in value of capital assets

- More useful than gross investment when looking at productivity and productive potential

Question 6

What are the factors influencing investment?

Answer 6

• Confidence
• Interest rates
• Animal spirits

Question 7

Define animal spirits

Answer 7

The forces that make markets move in large booms and busts as people buy and sell impulsively

Question 8

Define trade cycle

Answer 8

The pattern of economic growth which changes from booms to busts in fairly regular patterns

Question 9

Define fiscal policy

Answer 9

The manipulation of government spending and taxation in order to control the level of AD

Question 10

What are the factors influencing net trade?

Answer 10

• SPICED (exchange rates)
• The state of the global economy (recession = less imports but more exports)
• Degree of protectionism/trade barriers

Question 11

What causes a movement along or a shift in AS?

Answer 11

Movement along = change in price level
Shift = change in production costs (for all firms)
- Short run = change in raw materials, wages, exchange rates
- Long run = more education/healthcare/technology

Question 12

What is a SR change on AS?

Answer 12

Shift = change in production costs (for all firms)

• Short run = change in raw materials, wages, exchange rates
• Long run = more education/healthcare/technology

Question 13

What is a LR impact on AS?

Answer 13

• spare capacity
• bottlenecks
• full capacity

Question 14

Define bottlenecks

Answer 14

Where restrictions in the capacity to increase production occurs, meaning that prices will start to rise as output rises
- On graph = middle bit (some constrictions in supply change)

Question 15

What are the labour market factors influencing LRAS?

Answer 15

• Changes in relative productivity = productivity gap = shift right LRAS
• Changes in education and skills (shift right)
• Demographic changes and migration (more workers = larger workforce)
• More healthcare spending

Question 16

What are the product market factors influencing LRAS?

Answer 16

• Tech advances (less cost/more productive)
• Gov regulation (maintain competition)
• Less trade barriers