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Economics - Macro > 2:2:1 - Aggregate Demand - Aggregate Demand And Supply > Flashcards

2:2:1 - Aggregate Demand - Aggregate Demand And Supply Flashcards

1
Q

Classical economists view is that fiscal policy causes….

A

Inflation because of overspending by the government

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2
Q

What is the main influence on government spending?

A

The trade cycle

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3
Q

If you ignore tax what does a person do with their income?

A

Save (S) or Spent (C)

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4
Q

Will a change in investment change the level of aggregate demand?

A

Yes

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5
Q

Why might Exchange Rates change the value of net exports?

A

– If the value appreciates, imports become cheaper and exports more expensive on world markets –A strong currency worsens the net exports where is a weaker currency improves the figure

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6
Q

What is meant by the term Exports?

A

Is an injection into the circular flow of income (money paid for goods and services sold abroad enters the domestic flow of income)

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7
Q

Why do many machines become redundant?

A

– New methods of production are invented. - Investment in these machines does not have any long-term benefit

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8
Q

Is deflationary fiscal policy the same as tight fiscal policy?

A

Yes

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9
Q

What is meant by the term animal spirits?

A
  • refers to the state of confidence or pessimism held by consumers and businesses.
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10
Q

What is meant by Consumption?

A

Spending by households on goods and services

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11
Q

Reasons why the value of net exports might change.

A

– Level of real income – Changes in exchange rates – changes in the global Academy – degree of protectionism – Non-price factors

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12
Q

How much of aggregate demand does investment form?

A

10–15%

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13
Q

What is the net exports equation?

A

Exports – imports

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14
Q

What is meant by the Accelerator Theory?

A

states that investment levels are related the rate of change of GDP.

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15
Q

Because government spending accounts for 40% of all spending in the economy, but only 25% of aggregate demand, why does this happen?

A

Because a large part of government expenditure is paid out as transfer payments (These are welfare payments/Benefits)

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16
Q

What is meant by the term real income?

A

Income after taking into account inflation

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17
Q

How much of all spending in the economy is government expenditure?

A

£590 billion (40%)

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18
Q

What is expansionary (or loose) fiscal policy?

A

– Involves increasing Aggregate demand – By increasing government spending and cutting taxes – Lower taxes increase consumer spending because they have more disposable income – This will worsen the government budget deficit and government will need to increase borrowing.

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19
Q

Why is net investment more useful measure than gross investment?

A

It is a more useful measure if you want to look at the productivity of an economy and it’s productive potential

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20
Q

Why is confidence a determinant of Consumer Consumption?

A

If consumers are confident they are more likely To make large purchases.

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21
Q

What is meant by the key term fiscal policy?

A

The manipulation of government spending and taxation in order to influence the level of aggregate demand in the economy

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22
Q

What is meant by the term liquidity trap?

A

Is when interest rates are so low people decide to hold their money as cash instead of investing it.

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23
Q

What are the components of Aggregate Demand?

A
  • Consumption (C) - Investment (I) - Government Expenditure (G) - Exports (X) - Imports (M)
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24
Q

Evaluative points for the inverse relationship between interest rates and the level of investment.

A

– Investment is not based solely on interest rates – The interest elasticity of demand for investment is very low

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25
Q

Evaluative points for the fiscal policy – Depends on the state of the economy.

A

– Fiscal policy is most effective in deep recession where monetary policy cannot boost demand

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26
Q

On a AD and AS graph what macroeconomic changes when price levels increase?

A

This is Inflation

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27
Q

What does Consumption measure?

A

Measures the amount that consumers wish to spend at various price levels rather than save.

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28
Q

What will the value of net exports be, if the value of Imports is greater than the value of Exports?

A

A negative number

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29
Q

Why might non-price factors change the value of net exports?

A

– High quality products attract more buyers

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30
Q

Why does capital lose value?

A

– As it wears out – as it becomes less efficient

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31
Q

Do people spend more as their disposable income rises?

A

Yes, but at a slower rate

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32
Q

What are the factors affecting Government expenditure?

A

– The trade cycle – fiscal policy – National debt

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33
Q

What is meant by the term imports?

A

When there is an outflow of money

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34
Q

How can the price level be measured?

A

By a Price Index such as the CPI and the output by real GDP

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35
Q

What is meant by national debt?

A

Is the accumulation of budget deficits over the years

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36
Q

What is meant by gross investment?

A

Is the total Amount invested in the assets before taking into account appreciation.

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37
Q

There is an inverse relationship between what?

A

Interest rates and the level of investment.

38
Q

How does a loose (or expansionary) fiscal policy affect the budget deficit (national debt)?

A

Worsen the budget deficit (national debt).

39
Q

Diagram showing the classical and Keynsian Aggregate Supply curve.

A
40
Q

Why does the government use physical policy?

A

– Stimulate economic growth in periods of recession – Keep inflation low – Stabilise economic growth (preventing booms and recessions)

41
Q

Why is the Aggregate Demand curve downward sloping?

A
  • Lower prices in an economy mean increased international competitiveness, so there are more exports and fewer imports. - The total amount of spending is approximately equal whether prices are high or low because people have approximately the same amount to spend, so the area under the graph is fairly constant - At higher prices, interest rates are likely to be raised by the Monetary Policy, these mean that investment (component of AD) falls and savings might increase
42
Q

Evaluative points for the fiscal policy – depends on the other factors of the economy.

A

E.g.– If the government uses a expansionary fiscal policy but interest rates rise and the global economy is in a recession there will be little effect.

43
Q

On a AD and AS graph what does a output increase mean in terms of a macroeconomic objective?

A

Economic Growth

44
Q

How can the government deliberately manipulate aggregate demand when there is a slowdown in the economy and vice versa in a boom?

A

Slowdown – by overspending (running a budget deficit) Boom – underspending (running a budget surplus)

45
Q

In a boom or period of high economic growth, what happens to government revenues?

A

– Revenue from Taxation is likely to rise – The government is expected to run a fiscal surplus during a boom

46
Q

What factors affect investment?

A

-rate of economic growth – Business expectations – confidence indicators (competitors, government incentives and regulations) - Demand for exports (a low exchange rate) - Access to credit (How keen banks are to lend)

47
Q

What happens to actually get demand if the amount of imports falls?

A

Aggregate demand rises

48
Q

What is meant by the term bubble?

A

When there is a rapid escalation of asset prices followed by a contraction. • Investors buy a product expecting a huge return, prices rise because demand increases, prices get so high that investors loose confidence and sell shares leading to huge prices drops (This is the process of the bubble growing and bursting)

49
Q

Evaluative points for the factors that affect investment.

A

The irrational behaviour of humans keen to make profits or avoid losses, described by Keynes as animal spirits.

50
Q

Why did Keynes believe that we sell when prices fall?

A

– Because we are in a state of panic and we want to avoid further losses

51
Q

Because a change in investment changes the level of aggregate demand and vice versa, what is the name of the method to analyse this?

A

Accelerator

52
Q

What is meant by Disposable Income?

A

Income after tax

53
Q

How do you calculate the Accelerator coefficient?

A

Investment/Change in income

54
Q

What is meant by the term injections?

A

This is an increase of expenditure in the circular flow.

55
Q

What percentage of aggregate demand does government expenditure account for?

A

25%

56
Q

Kane stated that our [………..] In stinks mean we buy when we see prices are rising

A

Irrational

57
Q

What were Keynes’ views?

A

– He opposed the classical view (Where human behaviour is assumed to be rational markets are left to themselves, Laissez faire, And governments should have no determining role in the level of aggregate demand.

58
Q

Wise interest rates are key determinant of consumer consumption?

A

– Higher interest rates with consumers with less spending money after housing costs. – They also increase the cost of hire purchases

59
Q

Disadvantages of using fiscal policy.

A

– Can create budget deficits (A budget deficit is when the government spends more than the money it earns from taxation) - Hard to predict when to apply taxes (governments miss calculate the start of a boom and raise taxes too early) - Can be politically motivated(Applying Taxes is it unpopularAnd could be politically dangerous to implement) – Time lags

60
Q

What is meant by Aggregate Supply?

A

The total planned output of goods and services in the UK

61
Q

What does the equilibrium of AD and AS mean?

A

Determines the average price Level and the equilibrium real output level.

62
Q

When any components of aggregate demand rises the curve shifts to the…

A

Right

63
Q
A
64
Q

Evaluative points for the fiscal policy – The multiplier affect?

A

– The effectiveness of fiscal policy depends upon the multiplier affect –If the multiplier effect is large then the affect of government spending will have a greater impact on demand

65
Q

Why is there an inverse relationship between interest rates and the level of investment?

A

Because firms often borrow from banks to finance investment so if interest rates rise the cost of borrowing rises and firms are less likely to borrow, and therefore less likely to invest.

66
Q

Diagram of the Circular Flow of Income

A
67
Q

Is expansionary fiscal policy same as Lewis fiscal policy?

A

Yes

68
Q

Why does the Accelerator affect occur?

A

1 - Increase in consumer demand 2 - Firms get close to full capacity 3 - Firms invest to meet rising demand

69
Q

What happens to AD when the Price Levels rise?

A

Aggregate Demand Contracts

70
Q

Why might the Global Economy change the value of net exports?

A

– If there is a recession in country A but country B does not experience to slow down. Then country A will buy fewer exports from country B and will attempt to export more to country B

71
Q

What happens when there is deflationary (or tight) fiscal policy?

A

– Decreasing Aggregate demand – Government spending decreases and taxation increases - Higher taxes reduces consumer spending – Tight fiscal policy improves the budget deficit

72
Q

The Keynesian view is that […….] Is a powerful tool in shifting Aggregate Demand.

A

Fiscal Policy

73
Q

What is meant by Aggregate Demand?

A

The total planned expenditure on goods and services produced in the UK

74
Q

What is the meaning of the term demand deficient?

A

When there is a persistent decline in aggregate demand

75
Q

What happens to Aggregate Demand when the price level falls?

A

The level of AD expands along the AD curve

76
Q

Diagram showing a fall in Aggregate demand which caused a fall in price level and didn’t change real GDP (full capacity)

A
77
Q

What is meant by the term withdrawls?

A

This is leakages from the circular flow

78
Q

What is meant by the term trade cycle?

A

The cycle of economic growth which changes from booms to recessions or slow growth in a fairly regular pattern.

79
Q

What is meant by net investment?

A

Gross investment minus depreciation

80
Q

In a boom or a period of high economic growth, What happens to government expenditure?

A

– It is likely to fall as there is less demand for Jobseeker’s Allowance.

81
Q

What is fiscal policy used for?

A

– To prevent bubbles in growth – markets from getting too big • Taxing more heavily in terms of abundance is a useful way to put the brakes on the economy.

82
Q

What is the Aggregate Demand Equation?

A

AD = C + I + G + (X - M)

83
Q

What is the housing market a key determinant of consumer consumption?

A

– When house prices accelerate upwards home owners feel wealthier (Wealth Effect)

84
Q

Anything that improves confidence in future sales patterns is likely to lead to a rise in what?

A

Investment

85
Q

What is the main component of Aggregate Demand?

A

Consumption - around 60%

86
Q

What is meant by investment?

A

Investment is an increase in the capital stock. It means creating assets that will generate income in the future rather than in the immediate term.

87
Q

Will change in aggregate demand also lead to a change in the level of investment?

A

Yes

88
Q

Diagram showing the effect of a shift in AD on Price and Real Output

A
89
Q

The AD curve is [……….] sloping

A

Downward

90
Q

How does tight (or deflationary) fiscal policy affect the budget deficit (national debt)?

A

It improves the budget deficit (national debt).

91
Q

What is the difference between government spending and tax revenue called?

A

Budget (or fiscal) deficit or surplus

92
Q

What Are the key determinants of Consumer Consumption?

A
  • Confidence of the consumer, in terms of job security and future income prospects - Interest Rates - Housing market

Economics - Macro (27 decks)

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