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Macroeconomics > 2.2 Aggregate Demand > Flashcards

2.2 Aggregate Demand Flashcards

(73 cards)

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1
Q

What is consumption

A

the consumer spending on goods and services

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2
Q

how much of AD is C

A

60%

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3
Q

what is investment

A

spending by businesses on capital goods such as new equipment, buildings and working capital

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4
Q

what % of AD is investment

A

15-20%

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5
Q

what is government spending

A

Spending by government on providing goods and service, often public and merit goods, both on wages and salaries of public workers and on investment goods like new roads and schools

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6
Q

what isn’t included in government spending?

A

pensions and jobseekers’ allowance as they are just transfers

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7
Q

what % of AD is G

A

18-20%

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8
Q

what is X-M

A

net exports
imports are higher than exports; this is -ve as more money leaves than comes in
the UK has a large trade deficit

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9
Q

what % of GDP is X-M

A

5%
the smallest part

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10
Q

what is the AD curve

A

like a demand curve for an individual market but shows relationship between price level and real GDP

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11
Q

what is the income effect

A

rise in prices are not straight away matched by rise in income.
so people have lower real incomes so can afford to buy less, leading to a contraction in AD

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12
Q

what is the substitution effect (X-M)

A

if prices rise domestically, then foreigners will want to buy less british exports cos they’re more expensive and UK residents will want more imports cos they’re cheaper
X decreases
M increases
AD contracts

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13
Q

what is the real balance effect

A

rise in prices mean saved money will be worth less, so there is less security. this means people will save more so reduce spending and decrease AD

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14
Q

what is the high interest rate effect

A

Rising prices mean firms have to pay higher wages, so there is higher demand for money. If S stays the same, the price of money, like interest rates, will rise due to higher D. higher interest rates mean more saving and less borrowing, so less investment so AD contracts

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15
Q

what is movement along the AD curve caused by

A

change in prices (inflation/deflation)

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16
Q

what is movement of the AD curve caused by

A

change in any variable other than price change

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17
Q

define consumption

A

spending on consumer goods and services over a period of time

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18
Q

what does Y represent

A

Disposable income

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19
Q

what is disposable income

A

money consumers have left to spend after tax has been removed and state benefits have been added

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20
Q

what is the most important factor in determining level of consumption

A

disposable income

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21
Q

what is MPC (AD)

A

marginal propensity to consume

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22
Q

what is marginal propensity to consume

A

what proportion of a person’s increase in income is spent (as opposed to saved)

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23
Q

what is the average MPC of poorer people

A

higher as they are likely to spend much more of the increase

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24
Q

what is the average MPC of richer people

A

lower as they are more likely to save it

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25
what is APC
average propensity to consume
26
what is average propensity to consume
average amount spend on consumption out of total income
27
what is APC likely to be in an industrialised country
less than 1 as people save some of their earnings
28
how to calculate MPC
change in consumption __________________ Change in income
29
how to calculate APC
total consumption __________________ total income
30
what are savings
what is NOT spent out of income
31
what is the relationship between savings and consumption
increase in one decreases the other factors that affect one do the same thing to the other but oppositely
32
what is MPS
marginal propensity to save is how much of an increase in income is saved
33
how to calculate APS
total savings __________________ total income
34
how to calculate MPS
change in savings __________________ change in income
35
what is APS
Average propensity to save is the average amount saved out of income.
36
how do interest rates affect consumer spending
most major purchases are on credit, so interest rates will affect the consumer high interest -> reduces consumption increasing interest rates decreases value of shares
37
how does consumer confidence affect consumer spending
if future predictions are +ve, then spending increases if predictions are -ve such as thinking a recession will occur then saving will increase if tax is expected to rise then they will buy now if interest is set to drop then they will wait to buy
38
what are wealth effects
people with greater wealth have greater consumption.
39
what is wealth
a stock of assets
40
how is the wealth effect experienced
real house prices rise as owners have more wealth so are more confident in spending, so can just borrow if they end up struggling due to their house> their mortgage
41
what is an alternative example of the wealth effect
share prices rise so people sell some so spend this money and increase consumption as they know they still have other shares to fall back on if stuff goes wrong
42
how does distribution of income affect consumer spending
high earners save a higher % of income so change in distribution affects net consumption movement from the rich to poor would increase consumer spending
43
how do tastes and attitudes affect consumer spending
In modern Western society, there is a strong materialistic drive that encourages people to have the newest and best items, so spending can be very high, sometimes above income. less materialism would cause spending to decrease
44
What is investment
addition of capital stock to the economy
45
general example of investment
machines and factories used to produce other goods and services
46
what is not considered investment
buying a share in a company as it is saving as it doesn’t create a real product
47
what happens to machinery over time
it depreciates as it wears out or gets used up
48
what is gross investment
amount invested, ignoring the level of depreciation
49
what is net investment
gross investment - depreciation value
50
what % of investment is lost to depreciation in the UK
75%
51
how does rate of economic growth influence investment
growing economies have higher levels of investment due to confidence & higher demand leads to higher rate of return
52
how are investment and economic growth linked
growth requires investment to cope with levels of demand. Investment will not increase if growth does not occur. Demand drives investment
53
what is the accelerator theory
investment over a period of time is the change in real incomes x capital-output ratio If incomes rises, so will investment levels
54
What is capital output ratio
amount of investment needed to produce a given amount of goods
55
how do animal spirits drive investment
confidence leads to investment in order to prepare for the future
56
how did animal spirits get used by John Maynard Keynes?
He used the term to describe the feeling of managers and owners of firms on whether their investment would be profitable. Arguably difficult to measure according to him
57
how does demand for exports affect investment
If the world economy is booming then demand for X is likely to increase so exporting firms increase I to cope with demand This has a knock-on effect to other firms
58
how do interest rates affect investment
most I is done through borrowing so lower rates of interest mean borrowing is cheaper Also if interest rates are high, firms will save instead of invest
59
how does influence of government and regulation affect Investment
policy can encourage investment Tax breaks can be used Also highly regulated economies see less investment as it costs more to get past regulations
60
how does access to credit affect Investment
less access and higher interest rates means that investment is lower as it has a higher risk, firms do not want to not be able to pay back the money
61
How does retained profit affect Investment
profits kept by a firm and not shared with shareholders used to pay taxes. Small firms do not often take into account the opportunity cost of investment from these Higher retained profits means more availability to invest
62
how does technological change affect investment
speed up or improve production so higher profitability so investment is more likely to be successful (also means they need to invest more to keep up pace with new tech)
63
how do costs affect investment
more cost means more risk so lower investment as there is lower chance of profitability
64
How is the trade cycle affected by government expenditure
during recessions it increases to meet unemployment benefits, and spending also increases to increase demand and reduce unemployment Vice versa true
65
How does fiscal policy affect government spending
some is fixed from year to year like schools and pensions They can change what they spend on other things in the budget: decisions on spending and taxes based on priorities
66
how does age distribution affect government spending
Ageing population leads to increased spending on pensions, social care etc a younger population means increased education More dependents in the economy means higher spending
67
what is a “dependent“
A person in the economy who relies upon the government to sustain themselves
68
How does real income affect the net trade balance
When real income is high, increased imports occurs as demand increases for G&S so deficit increases
69
how does exchange rate affect trade balance
SPICED WPIDEC Prices change so demand changes
70
how does the state of the world economy affect trade balance
if where we export to is doing well, our exports will rise as they buy more Vice versa also true
71
how does the degree of protectionism affect trade balance
more tariffs domestically means less imports as the goods will be more expensive More tariffs abroad means less exports for the same reason Free trade increases (X-M) as a part of AD
72
how do non price factors affect trade balance
higher quality and design and marketing means they will have higher demand so exports will increase Also means more price inelastic
73
how do prices affect net trade
High prices means less competitive so less exports Also higher inflation rates means prices rise faster Productivity per worker also decreases costs and prices will be lower PED being elastic means higher prices lead to a fall in net trade

Macroeconomics (7 decks)

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