Theme 2: Shifts in AD

Question 1

What is the multiplier effect?

Answer 1

Where an initial increase in injections leads to a larger increase in aggregate demand.

Question 2

Explain a chain of reasoning to why an £8.8bn investment has a larger effect than just that?

Answer 2

The money is used to employ new workers, who spend their incomes in the economy eg restaurants which causes sales for these firms to increase enabling them to expand and hire more workers. Who then spend their incomes in the economy. The government also receives more income tax, vat and corporation tax. Restarting the cycle.

Question 3

What is a real life example of the multiplier effect?

Answer 3

£8.8bn government spending UK real GDP increased by £16.5bn

Question 4

What is the multiplier ratio?

Answer 4

Multiplier ratio = Total change in real GDP / Initial injection

Question 5

What are 3 injections into the economy?

Answer 5

Government spending
Exports
Investment

Question 6

What are 3 withdrawals?

Answer 6

Savings
Tax
Imports

Question 7

What is the downward multiplier effect?

Answer 7

An initial increase in withdrawals leads to a larger decrease in aggregate demand.

Question 8

What is an evaluation for the likely impact of an increase in government spending on benefits?

Answer 8

There is an opportunity cost to an increase in spending on benefits. By spending more on benefits, the government has less money available to spend on other projects like Crossrail.

Question 9

How does an increase in income effect AD

Question 10

How does an increase in benefits effect AD

Question 11

How does an increase in interest rates effect AD?

Question 12

How does a decrease in consumer confidence effect AD?

Answer 12

A decrease in consumer confidence will likely result in a decrease in AD

Question 13

When did consumers in the UK lose consumer confidence?

Answer 13

After the Brexit vote

Question 14

Components of AD

Answer 14

AD= C+I+G+(X-M)