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Economics > 2.2 - characteristics of aggregate demand > Flashcards

2.2 - characteristics of aggregate demand Flashcards

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1
Q

what is aggregate demand?

A

-the total demand for all goods and services in an economy at a given price level

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2
Q

how is the value of AD calculated?

A

expenditure approach
- AD = C + I + G +[X-M]

consumption, investment, gov spending and net exports

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3
Q

components of aggregate demand?

A

-consumption [60%]
-investment [15%]
-gov spending [25%]
-net exports [1%]

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4
Q

consumption?

A

: This is the spending by households on goods and services. It is influenced by factors like income, interest rates, and consumer confidence.
Example: During a recession, households may reduce their consumption due to uncertainty about the future, leading to a decrease in C.

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5
Q

importance of consumption?

A

In many economies, consumption is the largest component of AD. It tends to be stable and less volatile than other components.

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6
Q

investment?

A

Investment refers to spending by businesses on capital goods, such as machinery, buildings, and technology.

It is influenced by interest rates, business expectations, and government policies.

Example: Lower interest rates may encourage businesses to invest in new equipment and expand production.

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7
Q

importance of investment?

A

Investment can be highly volatile, especially during economic downturns when businesses may delay or reduce capital expenditures.

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8
Q

gov spending?

A

This represents government expenditure on public goods and services, such as education, defense, and infrastructure.
Example: A government may increase G by investing in a new highway project to stimulate economic activity and job creation.

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9
Q

importance of gov spending?

A

Government spending can be used as a policy tool to stabilize the economy during recessions and boost AD.

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10
Q

what is net exports?

A

-the difference between the revenue gained from exports and the expenditure of imports

This accounts for the difference between a country’s exports (X) and imports (M). A positive value indicates a trade surplus, while a negative value indicates a trade deficit

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11
Q

importance of net exports?

A

In open economies, the balance of trade can significantly impact AD. Countries with trade surpluses (X > M) contribute positively to AD, while those with trade deficits (X < M) detract from AD.

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12
Q

3 reasons why the AD curve is downward sloping?

A

-the interest rate effect

-the wealth effect

-exchange rate effect

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13
Q

interest rate effect?

👆

A

-at higher average price levels, there are likely to be higher interest rates –> higher IR = reduced investment = reduction real output demanded

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14
Q

the wealth effect?

A
  • as AP increases, purchasing power of households decreases and AD falls
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15
Q

exchange rate effect?

A

-as AP falls, IR likely to fall too –> lower IR = lower exchange rates

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16
Q

movement along the AD curve?

A

This occurs when there is a change in the price level (P) while other factors affecting AD remain constant. A change in P leads to a change in the quantity of Real GDP demanded, but the AD curve itself does not shift.
Example: If prices rise (inflation increases), there will be a decrease in Real GDP demanded, resulting in a movement up the AD curve.

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17
Q

2.2.2 [consumption]

what is income?

A

-transfer of value received over a set period of time in exchange for services/products

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18
Q

disposable income?

A

-the income than an individual receives after having paid any direct taxes and received any payments/benefits

-Disposable income is the income left over for an individual or household after taxes have been paid. It is a crucial determinant of consumer spending.

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19
Q

Relationship Between Disposable Income and Consumer Spending?

A

Generally, as disposable income increases, consumer spending tends to rise.
This relationship is explained by the marginal propensity to consume (MPC), which is the proportion of an additional dollar of income that a consumer spends.

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20
Q

discretionary income?

A

-income left after tax and other necessity payments

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21
Q

endogenous consumption?

A

-C determined by level of income

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22
Q

exogenous consumption?

A

-C irrespective of income

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23
Q

marginal propensity to consume?

A

the proportion of each additionl unit of income that is consumed

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24
Q

b) Understanding the Relationship Between Savings and Consumption?

A

When consumers save more (increase savings), they spend less on consumption.
When consumers save less (decrease savings), they spend more on consumption.

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25
what are savings?
Savings are the portion of income that is not spent on consumption. There is an inverse relationship between savings and consumption:
26
consumer confidence? [CC]
-more likely to borrow --> secure job, low inflation -a stronger economy = increased CC -feel secure in job, make regular payments -MSC increases Higher consumer confidence generally leads to increased consumer spending, as people are more willing to make major purchases when they believe the economy is doing well -opposite in a recessionary economy
27
influences on consumer spending?
-changes to IR -changes in consumer confidence -changes to wealth
28
how do changes to IR influence consumer spending?
-higher IR = greater incentive to save = less consumption -if IR increases, monthly payments can increase when saving you receive IR Lower interest rates tend to stimulate consumer spending because borrowing costs are reduced.
29
what is the positive wealth effect?
-rising property prices gives consumers confidence to borrow more money to spend
30
Wealth Effects?
When the value of assets such as homes or stocks increases, consumers tend to feel wealthier and spend more. Conversely, during a financial crisis, declining asset values can lead to reduced consumer spending.
31
2.2.3 [investment] what is investment?
-the addition to the capital stock of the economy
32
what is the gross investment?
-measures investment before depreciation
33
what is the net investment?
-measures investment after depreciation
34
what is depreciation?
-fall in the value of an asset over a period of time
35
what does investment do to an economy?
-helps to increase its capacity [production possibilities] increased capacity = increased potential economic growth
36
key influences on the decision by firms to invest?
-rate of economic growth -interest rates -demand for exports -influences of gov and regulations -animal spirits -business expectations -access to credit -firms will choose to invest if they feel they will make a good return on their investment
37
rate of economic growth on affecting decision to invest?
-increasing growth sends a signal that higher output will generate higher profits -faster economic growth the greater the urgency to invest -When the economy is growing at a healthy rate, businesses are more likely to invest in new capital to meet increased demand. -Conversely, during economic downturns, investment tends to decline.
38
interest rates on affecting decision to invest?
-most investment by firms is financed through business loans -decreasing IR encourages investment -there is a mostly inverse relationship between investment and IR
39
demand for exports on affecting decision to invest?
-if demand for E increase, firms will be more likely to invest to meet the global demand -demand for E can increase in the exchange rate increases
40
influence of gov intervention and regulations on affecting decision to invest?
-gov intervention can increase investment -gov regulation can decrease investment [raise cost of production and lower profits]
41
business expectations and confidence?
-the longer a period of economic growth, higher confidence -if growth slows, future expectations of profits will decrease and investment decisions will become harder -Positive expectations about future economic conditions and business prospects encourage investment. -High confidence in the economy can lead to increased capital expenditures.
42
Keynes and animal spirits?
-believed firms exhibit too much optimism in the good times and took too many risks -they run with the mood of the economy and make less rational investment decisions as they follow the trend -Confidence, optimism, and entrepreneurial spirit can drive investment even when rational analysis might suggest caution.
43
access to credit?
-the easier the access to loanable funds the higher the levels of investment The availability of credit, including loans and lines of credit, can impact a firm's ability to finance investment projects. During credit crunches, businesses may face difficulty obtaining funds for investment
44
2.2.4 [gov expenditure] what is gov expenditure influenced by?
-trade/business cycle and spending linked to achieveing policy aims
45
what does the trade cycle refer to?
The trade cycle, or business cycle, refers to the fluctuations in economic activity that an economy experiences over a period, typically measured by changes in GDP and other economic indicators.
46
what are the phases of the trade cycle?
-expansion -peak -contraction -trough
47
trade cycle: expansion?
Rising economic activity, employment, and income levels. Governments might reduce spending due to increased tax revenues and lower unemployment benefits.
48
trade cycle: peak?
Economic activity is at its highest. Government expenditure may stabilize as revenues peak.
49
trade cycle: contraction?
Decreasing economic activity, falling employment, and income levels. Government spending often increases to stimulate the economy through programs like unemployment benefits and public works.
50
trade cycle: trough?
Economic activity is at its lowest. Government spending is typically high to counteract the recession.
51
influence of trade/business cycle?
-unemployment decreases with a booming economy leading to lower levels of means tested benefits -tax revenue increase with a booming economy and can be used to pay back gov debt or increase spending on public goods
52
definition of fiscal policy?
Fiscal policy involves government decisions about spending and taxation to influence the economy.
53
influence of fiscal policy aims?
-fiscal policy announced during presentation f gov's budget -expenditure directly related to gov's objectives and policy aims
54
2 aspects to consider in regards to fiscal policy?
-1- gov's manifesto commitments 2- gov may use fiscal policy to manage events or crisis to support economy
55
injection?
Gov expenditure
56
what is government spending?
Includes expenditure on goods and services, infrastructure, education, and defense. Example: The U.S. government’s increased spending on infrastructure projects during economic downturns.
57
withdrawals?
-taxation
58
what is taxation?
Adjusting tax rates to control economic activity. Lower taxes can stimulate growth, while higher taxes can cool an overheated economy. Example: The 2017 Tax Cuts and Jobs Act in the U.S. aimed to stimulate economic growth.
59
expansionary fiscal policy?
Used during recessions to boost economic activity through increased spending and tax cuts. Example: The American Recovery and Reinvestment Act of 2009.
60
contractionary fiscal policy?
Used during booms to cool down the economy by reducing spending and increasing taxes. Example: Budget surpluses and reduced public spending in the late 1990s in the U.S.
61
other influences on fiscal policy?
-political factors -social needs -economic conditions -debt levels -external factors
62
other influences on fiscal policy: political factors?
Government priorities, party policies, and political stability can significantly impact spending decisions
63
other influences on fiscal policy; social needs
Demographic changes, such as aging populations, can increase expenditure on healthcare and pensions. Example: Japan's rising healthcare costs due to its aging population.
64
other influences on fiscal policy; economic conditions
Inflation rates, unemployment levels, and economic growth can affect government spending. Example: Increased unemployment benefits during high unemployment periods.
65
other influences on fiscal policy; debt levels
High public debt can constrain government expenditure due to the need for debt servicing. Example: Greece’s austerity measures post-2008 financial crisis.
66
other influences on fiscal policy; external factors
International events, trade relations, and global economic conditions. Example: Increased defence spending during geopolitical tensions.
67
2.2.5 [net trade] what is a floating exchange rate?
-demand and supply determine the rate at which one currency exchanges for another
68
what is a fixed exchange rate?
-the country's exchange rate is fixed in relation to say, the US dollar
69
what is an exchange rate?
Exchange rates are the value of one currency for the purpose of conversion to another.
70
what is appreciation?
-when the value of the currency increases [floating exchange rate system] [re-evaluation in fixed exchange rate]
71
impact of appreciation?
A stronger domestic currency makes exports more expensive and imports cheaper, potentially worsening the trade balance.
72
what is depreciation?
-when the value of the currency decreases -devaluation used under fixed exchange rate
73
impact of depreciation?
A weaker domestic currency makes exports cheaper and imports more expensive, potentially improving the trade balance.
74
impact on increase in domestic income?
Higher real incomes typically lead to increased consumption, including imported goods, potentially worsening the trade balance. Example: In the U.S., rising real incomes often correlate with increased imports from China and other countries.
75
impact of foreign income increase?
Higher real incomes abroad can boost demand for exports from other countries, improving the trade balance
76
what will happen to net trade balance after increase in real income?
-imported goods are usually normal goods, therefore an increase in demand for imports and worsening the UK's net trade balance
77
changes to exchange rates; what happens when value of currency falls?
--price of imports increases --price of exports will decrease
78
changes to ER; what happens when value of currency increases?
-price of imports will decrease -price of exports will increase
79
changes to exchange rates; what happens in the long run?
-fall int he value of currency is likely to improve net trade short run = inelastic long run = elastic
80
Impact: Global Economic Growth?
When the global economy is strong, demand for goods and services increases, benefiting exporting countries. Example: The global economic boom in the early 2000s increased demand for exports from emerging markets.
81
Impact: global recessions?
During economic downturns, global demand drops, negatively affecting export-dependent countries
82
what is protectionism?
-restriction on free trade such as tariffs and quotas -will impact net trade balance
83
what do tariffs do?
-increase taxes -shift AS to the left
84
what do quotas do?
-increase scarcity -reduce AS to the left
85
impact of high levels of protectionism?
Tariffs, quotas, and other trade barriers can reduce imports, potentially improving the trade balance but also risking retaliatory measures. Example: The U.S.-China trade war saw increased tariffs leading to reduced trade volumes.
86
impact of low levels of protectionism?
More open trade policies can increase imports, potentially worsening the trade balance but promoting competition and efficiency. Example: The European Union's single market facilitates free trade among member countries, increasing trade volumes.
87
non-price factors that affect the net-trade balance?
These include aspects other than price that affect trade, such as quality, innovation, branding, and trade agreements.
88
non-price factors that affect the net-trade balance; quality and innovation
High-quality, innovative products can maintain strong export performance despite price changes.
89
non-price factors that affect the net-trade balance; branding
Strong brand recognition can sustain demand for exports. Example: Global demand for American technology brands like Apple.
90
non-price factors that affect the net-trade balance; trade agreements
Agreements can reduce barriers and enhance trade flows. Example: The North American Free Trade Agreement (NAFTA) boosted trade between the U.S., Canada, and Mexico.
91
2.2.4 what is gov spending?
-an injection
92
what is taxation?
- a withdrawal
93
what is a fiscal deficit?
G-T > 1 --> gov spending is above tax revenue -the annual amount of borrowing undertaken by the government
94
decrease in taxation? | AD
decrease in tax = increased income/profit [can lead to increased imports] -->increased investment or consumption --> increased AD
95
increase in gov spending?
increased spending ---> increased AD

Economics (10 decks)

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