Aggregate Demand

Question 1

word definition of aggregate demand

Answer 1

the total amount of goods and services within a particular market at a given price level

Question 2

formula of aggregate demand

Answer 2

C + G + I + (X-M)

Question 3

what are the components of aggregate demand

Answer 3

• consumption
• investment
• government spending
• net exports

Question 4

what is the price level

Answer 4

the average of current prices across the entire spectrum of goods and services produced in an economy

Question 5

what causes a contraction or expansion along the AD curve

Answer 5

change in price level

Question 6

what causes a shift in the AD curve

Answer 6

change in component of AD

Question 7

what does consumption mean

Answer 7

household spending on goods and servives

Question 8

what does government spending mean

Answer 8

spending by governments of goods + services. DOESN’T include transfer payments

Question 9

what does investments mean

Answer 9

spending on fixed or working capital

Question 10

what does net exports mean

Answer 10

all money earnt from selling exports - all money earned from buying imports

Question 11

what 8 factors affect consumption

Answer 11

• wealth effect
• consumer confidence
• income taxes
• availability of credit
• population
• interest rates
• expectation of inflation
• employment

Question 12

what is consumer confidence

Answer 12

measures the degree of optimism that consumers feel about the overall state of economy and their personal financials situation

Question 13

what is disposable income

Answer 13

income after tax and bills

Question 14

what is a recession

Answer 14

two successive quarters of GDP falling

Question 15

what is gross investment

Answer 15

gross investment is before depreciation. it is the total spending by businesses on capital expenditure

Question 16

what is net investment

Answer 16

takes into account depreciation

Question 17

what is the accelerator effect

Answer 17

• increase consumption requires more production by firms to reach the household demand
• firms decide to increase their capacity and so spending on capital expenditure increases (leads back to an increase in consumption)
• when firms increase their capacity as a result of increased in C = accelerator effect

Question 18

what is the paradox of thrift

Answer 18

consumers = decrease C and increase savings
firms = postpone investment
higher savings and reduced investments both have the effect of reducing demand and incomes in the circular flow, causing aggregate demand to fall. banks more willing to make loans.

Question 19

what are the 7 factors effecting investment

Answer 19

• business expectations and confidence
• interest rates
• demand for exports
• rate of economic growth
• ‘animal spirits’
• access to credit
• the influence of government and regulations

Question 20

what does ‘animal spirits mean’

Answer 20

emphasise the importance of confidence and the ‘gut instinct’ of firms

Question 21

what is a budget deficit

Answer 21

when government spending exceeds the tax revenue

Question 22

what is a budget surplus

Answer 22

when tax revenue exceed the government spending

Question 23

what does stopping austerity do

Answer 23

stopping government spending decreasing and reducing taxes

Question 24

what happens to government spending in an economic boom

Answer 24

• increase spending as they would have higher tax receipts - increase their popularity
• spend less on benefits and transfer payments (more households will be employed)

Question 25

what happens to government spending in an recession

Answer 25

- increase spending on transfer payments - decrease in tax receipts from household and firms

Question 26

what is a trade surplus

Answer 26

when value of exports > value of imports

Question 27

what is a trade deficit

Answer 27

when value of imports > value of exporte

Question 28

what is specific tax

Answer 28

tax that only falls on the quantity sold and not on the fixed fee

Question 29

what is ad valorem tax

Answer 29

taxes fall on both the fixed fee and the price per unit

Question 30

if a good is price elastic what will the impact be on government tax revenue if there is a tax added on the good?

Answer 30

the entirety of the tax will be borne by the consumer. the government tax revenue will decrease due to then higher price of the good

Question 31

what is hedging

Answer 31

a strategy that tries to limit risks in financial assets by buying or selling an investment to potentially help reduce the risk of loss of an existing position

Question 32

what does ‘unwinding the hedge’ mean

Answer 32

refers to the closing trade that requires multiple steps, trade or time

Question 33

what is an exchange rate

Answer 33

the value of a currency in comparison to other countries

Question 34

what does SPICED stand for

Answer 34

Strong Pound Imports Cheaper Exports Dearer (expensive)

Question 35

what is relative inflation

Answer 35

- relative to other countries - if inflation is low, relative to other countries, then it is likely that our exports will be cheaper and more price competitive

Question 36

what are the factors affecting the price of net trade

Answer 36

- exchange rates - relative inflation - costs of production

Question 37

how does costs of production effect net trade

Answer 37

- cop increase = price of exports increase - price of exports increase unless exporters accept a cut in profits - countries without minimum wage posses a cost advantage over uk firsm

Question 38

what are non-price factors that affect net trade (demand for exports)

Answer 38

- quality/reliability - after sales service - fashions/trends - appearances - innovation - brand

Question 39

what is the marginal propensity to import

Answer 39

for every addition £ earned, how much is spent on imported goods

Question 40

what are the multiplier effect formulas

Answer 40

1. 1/1-MPC 2. 1/MPW

Question 41

what is MPC

Answer 41

marginal propensity to consume - for every additional £ earned, how much is spend through consumption

Question 42

what is MPW made out of

Answer 42

MPM + MPT + MPS

Question 43

what does trickle down economics rely on

Answer 43

low income households will have a MPC that is close to 1

Question 44

what is the multiplier effect

Answer 44

- when an initial change in aggregate demand has a much greater final impact on national income - it comes about because an injection to the circular flow of income stimulates further rounds of spending - the multiplier effect can occur when any of the components of AD initially increase due to an injection

Question 45

evaluate the multiplier effect

Answer 45

when MPC is low, each round of spending will be less. therefore if spending is low, the income for the next person will be lower

Question 46

what is the laffer curve

Answer 46

tax revenue by tax rate - supports trickle down economics: by reducing tax rates you increase tax revenue

Question 47

what is a negative output gap

Answer 47

when actual output is less than potential output

Question 48

what are the effects of a negative output gap

Answer 48

1. high unemployment rates 2. low economic growth 3. inflation - disinflation or deflation

Question 49

what is a positive output gap

Answer 49

when actual output is greater than potential output

Question 50

what is the effect of a positive output gap

Answer 50

1. inflation 2. increasing current account deficit (trade deficit) - ^MPC - ^M - vAD 3. unsustainable