Yr 12 Feb To April ish

Question 1

What is aggregate demand (AD)?

Answer 1

The total demand & expenditure on all goods and services in an economy at any given price level or given period in time.

Question 2

What can AD be used to measure?

Answer 2

GDP

Question 3

What are the components of AD? + the equation

Answer 3

• Consumption: The action of using up a resource
• Investment: The action or process of investing money for profit, usually on capital goods
• Govt Spending: The spending by the public sector on goods and services, like education, defence etc.
• Net trade: Total exports minus total imports
  AD = C + I + G + (X-M)

Question 4

How do the following effect govt spending;

1) Approach of general election
2) A fall in tax revenue
3) A rise in crime levels
4) A fall in population
5) An increase in air pollution

Answer 4

1) Govt will spend more - govt failure
2) At first it will decrease then increase as benefit
3) It will increase - currently the govt has pledged an extra £100m
4) Spend more as less tax is coming or decrease as less is going out
5) Increase as more people getting sick & govt is investing in renewable energy. Decrease due to tariffs on fuel

Question 5

How does price affect the AD curve?

Answer 5

A change in the average price level causes a movement along the demand curve. Wine usually costs £10 so Mr Sodhi buys 1 bottle, but today it costs £9 so Mr Sodhi can by 2 bottles.

Question 6

How does a non-price thing affect the AD curve?

Answer 6

A non-price change in any of the components will cause a shift. Wine usually costs £10 so Mr Sodhi buys 1 bottle, but today Mr Sodhi’s income has increased so he can now buy more wine - 2 bottles.

Question 7

What is investment?

Answer 7

Investment is spending money on capital goods such as as new factories & other buildings, machinery, vehicles.

Question 8

What is net investment?

Answer 8

Spending by businesses on additions to capital stock, which expands the economy’s productive capacity. At NEEs - E.g. Purchase additional machinery

Question 9

What is replacement investment?

Answer 9

It does not add to capital stock but replaces parts of the capital stock that have worn out + need renewing.

Question 10

What is gross investment?

Answer 10

Total spending by businesses on investment goods, includes both net and replacement.

Question 11

How does the rate of economic growth affect investment?

Answer 11

• It should lead to more investment as businesses expand productive capacity.
• This allows businesses to produce more output to profit from higher growth

Question 12

How does business expectations & confidence affect investment?

Answer 12

• Business confidence improves if business feel more optimistic about future sales + profits. Can be influenced by the rate of growth
• If confidence rises, businesses will invest more, as they are anticipating higher sales + profits.

Question 13

How does Keynes and ‘animal spirits’ affect investment?

Answer 13

• Keynes believed investment was determined partly by ‘animal spirits’
• This is a reference to the fact that animal spirits often move collectively. For example, one manager will make a decision as to whether to spend money on investments, and a herd instinct will emerge as other managers follow this decisions.
• It will rise or fall depending on these collective spirits

Question 14

How does demand for exports affect investment?

Answer 14

• If businesses can export more, they may need to expand their productive capacity
• A rise in the demand for exports may increase the amount of investment spending

Question 15

How does interest rates affect investment?

Answer 15

• Higher interest rates mean a higher cost of borrowing (so they will have to pay back more)
• This reduces the profitability of investment, leading to a decrease in investment spending + vice versa
• Though if interest rates rise, investments in backs increase, as people are saving more than spending.

Question 16

How does access to credit affect investment?

Answer 16

• This is the ability of individuals or enterprises to obtain financial services, including credit
• Even if interest rates are low, businesses may be able to borrow if they can’t access credit
• Banks are sometimes reluctant to lend for business investment, as there no guarantees that they will be able to pay it back or if there is a financial crisis.

Question 17

How does the influence of govt and regulations affect investment?

Answer 17

• Changes in tax rates: e.g. corporation tax on businesses profits - can influence the level of investment spending -> If you had profts between £300,000 and £1.5m then you claim marginal relief to reduce your corp tax, this had the expectation that you’d invest back into the company
• Govts can also give assistance to business to encourage investment like subsidies
• Regulations like planning permission rules can be relaxed by govt to encourage more investment

Question 18

What is consumption?

Answer 18

Total planned household spending - E.g. clothing + food, washing machines and fridges.

Question 19

What is the most determinant factor of consumption?

Answer 19

Disposable income (income after taxation)
A rise in incomes = households spend more, but rise in income can mean people save more.

Question 20

Define Average propensity to consume. Give the equation.

Answer 20

The proportion of income that households devote to consumption.
C/Y => consumption/income

Question 21

Define Marginal propensity to consume. Give the equation.

Answer 21

The proportion of additional income devoted to consumption.

Change in consumption/change in income

Question 22

Define Marginal propensity to save.

Answer 22

The proportion of an increase in disposable income that households would devote to saving

Question 23

What are the other factors of consumption?

Answer 23

1) Wealth of households - accumulation of assets, e.g. changes in house prices can affect the wealth of a household + influence their expenditure.
2) General state of the economy - if households spend more they have more confidence to consume (those who have jobs). This is the opposite in a recession
3) Borrowing money - if there are high interest rates that will affect the cost of borrowing is high, so households are likely to spend less BUT IT DOES ENCOURAGE SPENDING. e.g. if there are high interest rates then they will get more in return for saving.
4) Expectation of future inflation - E.g. Brexit.

Question 24

Define consumption function.

Answer 24

The relationship between consumption + disposable income - its position depends on other factors that effect how much households spend on consumption.

Question 25

What is the impact of changes on Govt Spending?

Answer 25

• If the govt raises taxes at the same rate as a rise in spending, there might be little impact on total spending in the economy. (If they raise income tax threshold then they may raise taxes elsewhere)
• A rise in total spending with no changes in taxation will have a greater impact
• Govt spending can be greater than govt receipts with such taxation. When this happens there will be a budget deficit, (the amount by which a sum of money is too small)
• When govt spending is less than govt receipts such as taxation, there will be a budget surplus.
• A rise in govt spending with no changes in taxation will either reduce a budget, or increase a budget deficit.

Question 26

How does price influence Exports + Imports?

Answer 26

The higher the price, the lower the QD.

Question 27

How does real income in the domestic economy influence Exports + Imports?

Answer 27

If the economy is doing well, then real incomes of households will rise + they will spend more on imported goods + services.

Question 28

How do exchange rates influence Exports + Imports?

Answer 28

The exchange rate is the price at which one currency is sold for another, a rise in the value of the pound means that it costs more for foreigners to buy so exports will decrease, vice versa.

Question 29

How does the state of the world economy influence Exports + Imports?

Answer 29

If the economy of the countries we trade with are doing well then the UK is more likely to export and increase exports, though in a recession demand will decrease.

Question 30

How does the degree of protectionism influence Exports + Imports?

Answer 30

Almost all countries limit goods + services coming into their economy. E.g. They can put a quota on their goods, or they may put tariffs on imports. The greater the degrees, the more difficult it will be for the UK to export goods. Since the UK is in the EU, the barriers to trade are very low,, so it is easy to trade within the EU but it is very hard outside.

Question 31

How does non-price factors influence Exports + Imports?

Answer 31

X and M can be bought just on price like steel and copper, however the design of a brand is unique or advertising + branding makes a strong brand image like Supreme then demand will increase even if supply is the same.

Question 32

What are the benefits of economic growth?

Answer 32

1) Consumers - in the short run, it can bring benefits, as they can buy more goods + services. UK consumption per person per year has a 3-fold increase, from £224 in 1955 to £20,090 in 2013
2) LE has associations with income. It is now 82 yrs vs 49 yrs in 1900
3) People have enough to eat and drink, there is actually enough food that overeating is an issue in the UK
4) Housing standards are high
5) High LR
6) Health tends to be better and LE is better, quality of life during old age has increased

Question 33

What is sustainable growth?

Answer 33

When growth in the productive potential of an economy toady, should not lead to a fall in the productive potential of an economy for future generations.

Question 34

What is the greatest threat facing humanity? - environmental

Answer 34

Global warming - Worst case: in 100 yrs, the planet will so warm that sea-levels would have risen so much that it would have made most the planet uninhabitable, creating a collapse in the world’s economy - only a forecast.

Question 35

What is the greatest threat facing humanity? - economic

Answer 35

Scarcity of resources - if there is an increase in prices then 3 things will happen

1) Demand then consumption will fall, resulting in conservation
2) It more profitable to research into new supplies of the resources
3) Producers and consumers switch to substitutes - e.g. polluting cars to electric cars

Question 36

How will govts react to scarcity?

Answer 36

• Nowadays, activity of industry are regulated a lot more in 30 years ago. Western govts have implemented strict greenhouse gas emission limits.
• Some believe the effects of climate change are irreversible and there is no clear consensus of how to reverse growth and consume less