Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

economics > 2.2 aggregate demand (AD) > Flashcards

2.2 aggregate demand (AD) Flashcards

1
Q

what is aggregate demand?

A

the total of all demands or expenditures in the economy at a given price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what is the equation of aggregate demand?

A

consumption + investment + gov. spending + net exports (exports - imports)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

how do you calculate net exports?

A

exports - imports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what are the sources of aggregate demand?

A
  • households
  • gov
  • firms/businesses
  • foreigners
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what are exports and imports?

A
  • exports: products sold abroad
  • imports: products brought from abroad
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what are the two factors on the axes of the aggregate demand curve?

A

y - general price level
x - real national output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what is real income?

A

how much you can buy with your monetary income alongside inflation rates affected by price level - essentially purchasing power

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what happens to domestic good when price levels rise?

A
  • when price levels rise, domestic goods become more expensive
  • making them less price-competitive (as people begin to look for cheaper alternatives in the international markets)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what happens to domestic good when price levels decrease?

A
  • when price levels decrease, domestic goods become less expensive
  • making them more price-competitive (they become more affordable than alternatives in the international market)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

why does the AD graph slope downwards?

A

REAL BALANCE EFFECT: as price levels rise, the value of real income falls - consumers are less able to buy products with the monetary income they have
- a persistent rise in the price level of country X could make foreign-produced goods and services cheaper, causing a fall in exports and a rise in imports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what is the exception to the persistent increase of price levels causing the AD curve to slope downwards?

A
  • an exception is if that country is the only source of that product; fewer substitutes available
  • if other countries are also suffer from same or higher levels of inflation
  • if that country’s product is of superior quality
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what causes shifts in graphs?

A
  • if there is an increase due to a third variable -> the curve shifts to the right
    • if there is a decrease due to a third variable -> the curve shifts to the left
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what is Y = E = O?

A

increased AD leads to economic graph
income = expenditure = output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

what is consumption?

A

total expenditure by households on goods and services over a period of time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

what are some factors that affect consumption?

A

mainly income! an increase in income leads to an increase in consumption
other factors that affect income: taxes, economic state, employment rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what is keynesian theory of consumption?

A

john maynard keynes - Y is the most important determinant of C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

what is disposable income?

A

the money remaining after you have had your taxes deducted

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

what is discretionary income?

A

the income remaining after all necessary additional taxes and necessary bills, including bills, rent, mortages and basic needs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

what is the equation for disposable income?

A

cross-annual income - payable taxes (and other deductions)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

what is the equation for income?

A

consumption + savings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

how do income and consumption relate in terms of AD?

A

1) low levels of consumption
2) income tax reduced
3) all workers have more disposable income
4) workers are encouraged to spend more in shops, buying more goods
5) as a result, total consumption begins to increase. therefore AD begins to increase

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

what is the average propensity to consume (APC)?

A

ratio that tells how much much an economy spends on consumption for every dollar it consumes. consumption / income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

what is the average propensity to save (APS)?

A

ratio that tells how much an economy spends on saving for every dollar it consumes. saving / income

24
Q

what is the marginal propensity to consume (MPC)?

A

an index which tells how much of an increase in national income will be developed to increase consumption spending. change in consumption / change in income

25
Q

what is the marginal propensity to save (MPS)?

A

an index that tells how much of an increase in national income will be developed to increase saving spending. change in consumption/change in income. change in saving/income

26
Q

how do interest rates affect AD?

A

1) interest rates increase
2) cost of borrowing and reward for saving increases and discretionary income decreases
3) spending decreases, saving increases -> overall decrease in consumption
4) AD decreases

27
Q

why might an increase in income not lead to an increase in consumption?

A
  • as interest rates increase, there is automatically a higher reward in saving rather than spending
  • as a result, the increase in interest rate may offset an increase in income
28
Q

what is wealth? What counts as physical and monetary wealth?

A

The net value of assets and resources owned - be separated into physical and monetary wealth
Physical wealth: stocks, pension
Monetary wealth: cars, properties

29
Q

what are the factors affecting investment?

A

Interest rates, corporate tax, business confidence

30
Q

what do businesses use to finance investment?

A

borrowing and expenditure of retained profit

31
Q

what do businesses spend their money on?

A
  • Human capital (workforce)
  • property (machinery)
32
Q

what is the chain of analysis for the effect of investment rates on investment?

A

1) interest rates fall
2) decreasing cost of financing the investment
3) firms are more inclined to invest in capital (and less inclined to save)
4) increase in investment
5) overall increase in AD

33
Q

what is the chain of analysis for the effect of corporate tax on aggregate demand?

A

1) corporate tax increase
2) firms will have fewer post-tax profits/retained profits
3) so they are less likely to invest (on capital investment) because their funds have decreased
4) overall investment decreases
5) AD decreases

34
Q

what is the rate of chain of analysis for the effect of business confidence on aggregate demand?

A

1) increased business confidence
2) firms expect an increase in sales and profits
3) more encouraged to go through with planned investments
4) overall AD increases

35
Q

what is business confidence?

A

Reflects the expectations regarding future sales, revenue, costs and profits - dependent on boom/recessions

36
Q

what is the accelerator effect?

A

when planned investment increases to meet the growth of consumer demand or national income

37
Q

what is the equation for the accelerator effect?

A

It = a (Yt - Yt -1)
investment over a time period = accelerator coefficient ( change in income within year t)

38
Q

what is an example of the accelerator effect?

A

if demand rises quickly: ‘
- firms respond by using existing productive capacity or use stocks of products
- if the high demand is sustained → they will then increase the spending on plant or machines to increase their supply capacity
- causes an accelerator effect → where change in demand for consumer goods and services will cause a greater % change in demand for capital goods.

39
Q

what is depreciation?

A

(Of the capital stock) the value of the output which has been used up or worn out in value of something

40
Q

what is the equation for net investment?
what does it mean if net investment is negative?

A

Gross investment - depreciation = net investment
If negative: productive capacity falls. → whether investment leads to economic growth depends on whether net investment is negative or positive -

41
Q

how do depreciation and gross investment relate?

A

If gross investment > depreciation:
Net investment is positive and there is an ↑ in productive capacity

If gross investment < depreciation:
Net investment is negative and there is an decrease in productive capacity

42
Q

what are the two types of government spending?

A
  • current spending: recurring expenses e.g wages for the NHS, road maintenance
  • capital spending: one time investment. e.g construction of motorways, flood defence schemes
43
Q

what are the three different types of budgets?

A

deficit: revenue < expenditure
surplus: revenue > expenditure
balanced: revenue = expenditure

44
Q

what does the government budget usually run at?

A

deficit budget : where expenditure is more then revenue
this isn’t always bad because investing in essential projects like these can lead to a more prosperous society and improved quality of life for its citizens

45
Q

what are the sources of government income?

A
  • taxes e.g income tax (26%), VAT (11%), NICs (17%)
  • government loans
  • revenue from public businesses
46
Q

what does the government spend on?

A
  • social protection e.g benefits (240bn, 32%)
  • healthcare (145bn, 20%)
  • education (145bn, 14%)
  • military (46bn, 6%)
47
Q

what is national debt?

A

the accumulated government borrowing when it is running a budget deficit -> if government manages to achieve a budget surplus, some of the national debt might be repaid

48
Q

how can the government increase their revenue?

A
  • increasing the tax rate at every bracket
  • reducing the tax base - (the total value of income, profits and spending which can be taxed)
49
Q

what are the two different types of taxes?

A
  • direct tax: it is already known who will pay these taxes e.g income tax, corporate tax
  • indirect tax: we don’t know who pays this tax e.g VAT
50
Q

how can revenue for governments be increased?

A
  • increasing the rate that can be taxed at every bracket
  • reducing the tax base (the total level of income, profits and spending that can be taxed)
51
Q

what affects government spending?

A

how much tax revenue is received

52
Q

what is an economic cycle?

A

the fluctuations of an economy between periods of expansion (growth) and contraction (recession)

53
Q

what are the characteristics of a boom?

A
  • economic growth (rise in GDP)
  • higher levels of production -> higher output
  • labour -> more employment
  • higher tax revuenue
  • increase in business and consumer confidence
54
Q

what are the characteristics of a recession?

A
  • fall in GDP
  • more unemployment as less is being produced
  • deflation
  • less tax revenue
  • fall in business and consumer confidence
55
Q

what is a recession?

A

a business cycle contraction that occurs when there is a general decline in economic activity - usually a widespread drop in overall spending

56
Q

how does a recession affect government spending?

A

1) government spending may increase during a recession or low AD
2) to control unemployment because more spending means more people will have jobs and they’ll have an income to spend
3) leads to a rise in AD

57
Q

how does a boom affect government spending?

A

economics (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions