Dec Test 2

Question 1

Define AD

Answer 1

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

Question 2

Aggregate demand formula

And what do the letters stand for

Answer 2

AD = C + I + G + (X-M)
C = consumption
I = investment
G = government expenditure 
(X-M) = value of net exports

Question 3

What are the relative importance of CIG and (X-M) to AD

In percentages

Answer 3

C =60%
I =15%
G =25%
(X-M) =1%

Question 4

Why does AD slope downwards? (3)

Answer 4

1) the net exports effect
2) the real wealth effect
3) the interest rate effect

Question 5

What is the net exports effect (downwards slope)?

Answer 5

Lower prices mean higher international competitiveness, meaning net exports are higher at lower prices

Question 6

What is the real wealth effect

Answer 6

Let w = nominal wealth
Then w/p = real wealth
As price falls, real wealth rises and people purchase more goods and services

Question 7

What is the interest rate effect

Answer 7

At higher prices, interest rates are likely to be raised by the monetary authorities
Higher interest = less spending

Question 8

What 4 things effect consumption?

Answer 8

Income
Consumer confidence
Interest rates
Housing market (higher housing price = higher consumption)

Question 9

What is consumption (C)?

Answer 9

Spending by households on goods and services

Question 10

What is Investment (I)?

Answer 10

Investment is the purchase of capital goods

Question 11

What are the influences on investment? (6)

Answer 11

Confidence future sales
Interest rates
Demand of exports
Access to credit
Accelerator effect (GDP increase so increase in capital investment)
Animal spirit (confidence = too many risks)
Gov. policy+regulations

Question 12

What happens to gov spending (G) when there is high economic growth?

Answer 12

G falls:
Less money on benefits
More tax revenue

Question 13

How do Keynesian vs Classical economists look at the effect of ^G

Answer 13

Keynesians : ^G can shift AD to the right

Classical : ^G only has inflationary effects and will not generate growth

Question 14

Influences on net exports (X-M)? (3)

Answer 14

Domestic income
Changes in exchange rates : weaker £ = more expensive exports = less demand of imports (M) and more demand of exports (X)
Protectionism (tax, restrictions, embargos)

Question 15

What is aggregate supply?

Answer 15

The total value of output of the economy at a given price level at a given point in time

Question 16

What is the assumption of short-run AS?

Answer 16

All money wage rates and all other factor input prices are fixed

Question 17

What is SRAS representative of?

Answer 17

The relationship between real GDP and the price level

Question 18

Why is the SRAS curve positive relationship?

Answer 18

When firms increase output the have to increase the rate of production so the cost of production will be more so they’ll increase their prices