Booklet Two Flashcards

1
Q

What is aggregate demand?

A

The total planned spending on the output (goods and services) produced in an economy

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2
Q

Aggregate demand is made up of 4 components

A

Consumption
Investment - spending by firms on capital
Government spending
Net exports - (exports-imports)

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3
Q

Formula for aggregate demand

A

AD = C + I + G + ( X - M)
aggregate demand = consumption + investment + government spending + (exports - imports)

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4
Q

what is consumption or consumer spending?

A

The act of using disposable income for the purchase of goods and services

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5
Q

Consumers spending is divided into three main areas:

A

.consumer durable
.consumer non durable goods
.services

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6
Q

Influences on consumer spending (7)

A

.Real income
.Unemployment
.Consumer confidence
.Wealth and the ‘wealth effect’
.Taxation
.Population
.Interest rates and the availability of credit

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7
Q

what is interest?

A

interest is the cost of borrowing and the reward for saving with financial institution

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8
Q

In the UK who is responsible for setting the interest rates (2%)

A

The bank of England

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9
Q

what is the bank of England base rate?

A

5.25%

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10
Q

when does the economy reaches a state of equilibrium?

A

when the rate of withdrawals = the rate
of injections.

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11
Q

Interest payments that affects consumers : (4)

A

1)savings - interest for saving goes up meaning consumers are less likely to spend
2)Variable mortgage rates increase - disposable income decreases
3)Loan - interests rate are low people are more likely to take out a loan
4)credit

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12
Q

what is consumer confidence?

A

Households willingness to spend their incomes and also take on debt

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13
Q

Define marginal propensity to consume (MPC)

A

The portion of an increase in income that is spent

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14
Q

What is the average propensity to consume (APC)

A

The proportion of a consumers total disposable income that they spend

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15
Q

What is the multiplier effect?

A

The multiplier effect occurs when an initial increase in aggregate demand has a bigger impact on the real national income

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16
Q

The multiplier effect process (4)

A

1)Initial increase in aggregate demand
2)Increases the real national output
3)Increase in consumers spending
4)Aggregate demand increase again

(The multiplier also works in reverse)

17
Q

Formular for calculating the size of the multiplier

A

Size of the multiplier = 1/(1-MPC) = 1/MPS

18
Q

The formula for the final increase in national income

A

Initial increase in spending X The value of the multiplier

19
Q

What is investment?

A

spending by firms on capital

20
Q

A country’s gross investment includes 2 parts
What are they?

A

Replacement investment - spending to fix old capital
Net investment - spending on new capital

21
Q

The determinants of investment in fixed capital are: (9)
(factors that influence the decisions of businesses or individuals to invest in long-term assets)

A

1)Price of labour
2)Price of capital
3)Consumer confidence
4)Technological change
5)taxation
6)interest rate
7)market growth
8)business cycle
9)Business confidence “animal spirits” Keynes

22
Q

what is the accelerator effect?

A

When an increase in a component of aggregate demand (e.g. consumption) leads to an increase in investment triggering a further increases in aggregate demand

23
Q

The accelerator effect process (4)

A

1)initial increase in aggregate demand
2)(some) firms need more capital to produce additional output
3)firms invest more
4)Aggregate demand increases again

24
Q

What is government spending?

A

expenditures made by the government in the economy (e.g. the public sector things such as hospital, prisons and schools)

25
Q

What is crowding out?

A

occurs when increased government spending leads to a decrease in private sector spending (businesses or individuals)

26
Q

what is short run growth?

A

The time period in which at least one factor of production is fixed in quantity
(a component in aggregate demand increases)

27
Q

what is long run growth?

A

The time period in which all factors of production are variable in quantity
(higher quantity/quality of factors of production or technology changes)

28
Q

what is the technical definition of a recession?

A

A recession is two consecutive quarters (6 months) of negative economic growth

29
Q

What is the marginal propensity to save?

A

The portion of an increase in income that is saved

30
Q

Factors that shift the LRAS curve to the right (classical or Keynesian) (8)

A

1)enterprise and innovation
2)education and training
3)increased productivity
4)discovery of natural resources
5)Population growth
6)New technology
7)increase in the size of the labour force
8)increased investment in capital

31
Q

What does YFE mean on the long run aggregate supply?

A

Full employment of all factors of production

32
Q

Factors that shift the LRAS curve to the left (classical or Keynesian) (4)

A

1)natural disaster or diseases
2)reduced productivity
3)net outward migration
4)capital investment below replacement level