4.4 (Macroecomomic Policies & Impact on Firms and Individuals) Flashcards
(10 cards)
4.4.1 What is aggregate demand?
+ 5 types of spending
- total demand in the economy
- total planned spending in the economy
+ C= consumer spending
+ I= investment (spending by firms on capital)
+ G= government spending (not including benefits)
+ X= exports
+ M= imports (removes £ from the economy)
What percentage of total spending does each type make up?
Example of a government spending budget
C= approx 60%
I= approx 15%
G= approx 25%
X-M= approx -1%
Department for Health= £115bn
Aggregate Demand equation
+ what are the fastest growing consumer spending categories?
AD= C + I + G + (X-M)
+ amusement parks
+ travel agents
+ pubs
+ restaurants
What are the 3 reasons for the AD curve sloping downwards?
1) Real Wealth Effect: changing price level changes purchasing power of assets causing consumers to buy more/less goods/services
2) Interest Rate Effect: changing price level changes the amount of savings in the economy changing the interest rate. This causes change in borrowing & investment
3) Exchange Rate Effect: changing price level changes the amount that people from other countries are willing and able to purchase
(high price= X decrease & M increase)
What is Aggregate Demand?
+ what are the axes for AD/AS graphs?
- what is the multiplier effect?
- total value of goods & services produced in an economy
- curve shows amount of goods that can be produced at diff price levels
+ Real GDP & Price Level
- an initial injection in the economy causes a bigger final increase in national income
What is full capacity output?
+ what happens when the economy reaches this?
- what are the possible causes of full capacity?
maximum level to which aggregate supply can grow
+ the economy is on the production possibility frontier (full employment)
+ the AS curve becomes inelastic because even at higher prices, firms cannot produce any more
+ if AD rises any more accelerating inflation will occur
- skills shortages
- supply constraints (overloaded infrastructure & capital investment cannot keep up w growth in demand)
What is accelerating inflation?
+ what are cost-push and demand-pull inflation
when AD increases beyond the ability of the economy to produce
CP: when prices increase due to rising costs of production
DP: when AD is growing but AS cannot grow fast enough to meet demand increasing prices
How are AD/AS and employment linked?
+ why does every economy need some unemployment?
- When AD is low, unemployment is high
- Expansionary monetary policies are employed to increase consumer spending & AD so businesses employ more people
- new technologies may increase AS but decrease AD & on a large scale lead to structural unemployment
+ to allow for change (frictional unemployment)
How does the AD/AS model shed light on the economy?
1) Globalisation has increased competition, helping reduce inflation & create major structural changes
2) Business expectations affect levels of investment
3) Changes in income distribution influence the impact of economic change
4) Leaving EU brought significant changes in trade patterns
Real life example of something which may change AS & AD in 2025
- why is Trump doing this?
+ possible changes to AD & AS
Trump’s Tariffs
- 10% on all goods from China
- 25% on all goods from Canada & Mexico
- hopes to stop/reduce imports eliminating the competition & making US firms buy from US suppliers (self-reliance)
- stop ‘illegal aliens & deadly drugs’ entering
- asserting USA’s power globally
+ AD may increase as US firms no have to buy from US suppliers. This may lead to increased profits & expansion decreasing unemployment & increasing consumer spending
+ AS may increase as competitors have left the market. Therefore, if possible firms may increase their output to increase revenue & profit
