2.2.1 - 2.2.5 aggregate demand

Question 1

components of AD

Answer 1

consumption
investment
gov spending
net exports

Question 2

two flows in flow of income

Answer 2

physical flow - real things
monetary flow- money that pays for the physical things

Question 3

economy’s circular flow of income come in the form of …

Answer 3

injections- form of exports, investment, gov spending
withdrawals- imports, savings, taxes

Question 4

if injections into the circular flow are greater than withdrawals then

Answer 4

means expenditure is greater than outputs

Question 5

if withdrawals from circular flow are greater than injections then

Answer 5

output is greater than expenditure

Question 6

multiplier effect

Answer 6

the actual change in the national income is greater than the initial injection

Question 7

aggregate demand def

Answer 7

the total demand of total spending in an economy over a given period of time

Question 8

aggregate demand formula

Answer 8

consumption (C)+ investment (I) + government spending (G) + (export (X) - imports (M))

Question 9

consumption definition

Answer 9

total amount spent by households on goods and services. it doesn’t include spending by firms.

Question 10

main factors affecting consumption and saving

Answer 10

. income- disposable income increases C increases
. interest rates- higher interest rates lead to less c spending
. consumer confidence- more confident abt economy more spending
. wealth effects- rise in wealth
. taxes- direct increases decrease C
. unemployment- unemployment rises decrease C

Question 11

diff between saving and investment

Answer 11

saving tends to be made by households and investment tend to be made by firms

Question 12

investment definition

Answer 12

money spent by firms on assets which they’ll use to produce goods or services ( ex- machinery )

Question 13

gross investment def

Answer 13

includes all investment spending

Question 14

net investment def

Answer 14

only includes investment that increases productive capacity ( 3 old trucks but replaces w 5 old trucks net investment is 2)

Question 15

how much c makes up AD and how much I makes up AD in uk

Answer 15

c- 66%
I- 15%

Question 16

factors that affect investment

Answer 16

.risk- high risk less inventing
. gov incentive + regulation- ex subsidies increase investment, relax gov reg increase investing
. interest rates + access to credit- higher interest rates decrease investing,
. technical advances- invest in new tech increase investment
. business confidence- higher confidence higher investing

Question 17

business confidence def

Answer 17

ability to make profits
which depends general optimism or pessimism of business

Question 18

keynes recognised not all investment based on rational thinking other factors included + what they’re called

Answer 18

called - animal spirit
. human emotion
. intuition
. gut instinct

Question 19

gov spending def

Answer 19

the money spent by the government on public goods and services

Question 20

what is not included in gov spending

Answer 20

transfer of money is not included- only money that directly contributes to the output of the economy is included

Question 21

if gov spending greater/ less than its rev there will be a

Answer 21

• budget deficit (g)
• budget surplus (lt)

Question 22

what might a gov do if economic growth is slow and demand is low

Answer 22

overspend to increase AD

Question 23

exports def

Answer 23

goods and services that are produced in one country then sold in another

Question 24

imports def

Answer 24

goods and services produced elsewhere and brought into a country

Question 25

factors that affect imports and exports

Answer 25

.exchange rate- in long run value of currency increases imports become cheaper. short run ex/imports both price inelastic ,,won’t change much . changes in state of world economy-higher real income higher imports . degree of protectionism- short run tariffs and quotas can increase net exports by reducing imports but long run countries may retaliate and introduce own tariffs . non price factors- quality of goods

Question 26

aggregate demand curve x axis and y axis

Answer 26

x- real national output y- price level

Question 27

what causes movement along AD curve

Answer 27

price level

Question 28

rise in price level will cause output to fall because

Answer 28

. decrease domestic consumption . decreased demand for exports . increase demand for imports

Question 29

what may cause AD curve to shift to the right

Answer 29

. rise in consumption . rise in gov spending . rise in investment . rise in net exports . reduction in income tax . gov changes fiscal policy . weak currency (exports cheaper imports more expensive) . increase labour ( price remains the same)

Question 30

what shifts AD curve to the left

Answer 30

. fall in consumption . fall in investment .fall in gov spending . fall in net exports . rise in interest rates . strong currency increases imports decreased exports ( cheaper imports) . decrease labour . increase unemployment

Question 31

multiplier does what to AD

Answer 31

leads to a larger increase in AD

Question 32

average propensity to consume (APC) formula

Answer 32

consumption/ total income

Question 33

average propensity to save (APS)

Answer 33

amount saved / total income

Question 34

marginal propensity to consume (MPC) def

Answer 34

the proportion of any extra income that’s spent on consumption of goods and services

Question 35

marginal propensity to save (MPS) def

Answer 35

the proportion of extra income that’s saved

Question 36

MPC formula

Answer 36

change in consumption/ change in income

Question 37

MPS formula

Answer 37

change in saving/ change in income

Question 38

what happens to multiplier effect if in MPC is low

Answer 38

then multiplier effect is small

Question 39

calculate multiplier from MPC

Answer 39

1/1-MPC

Question 40

marginal propensity to withdraw is

Answer 40

the proportion of any new income that’s withdrawn from the economy

Question 41

ways extra income can be with drawn

Answer 41

. saved . paid to the gov on taxes . uses to import goods from abroad

Question 42

marginal propensity to tax is (MPT)

Answer 42

the proportion of any new income that’s paid as taxes

Question 43

marginal propensity to import MPM is

Answer 43

the proportion of any new income that’s used to import goods

Question 44

how to calculate multiplier from MPW

Answer 44

1/MPW

Question 45

multiplier will be … if marginal tax rates are low

Answer 45

big bc low MPW ,, multiplier is big

Question 46

trade balance def

Answer 46

value of exports - value of imports