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Theme 2 Economics > Aggregate Demand > Flashcards

Aggregate Demand Flashcards

1
Q

What does aggregate demand show the relationship between?

A

Price level and real GDP

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2
Q

What is the income effect?

A

Rise in prices not matches straightaway by a rise in income, so real incomes are lower so demand drops

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3
Q

Substitution effect on BoP

A

Rise in UK prices reduces foreign demand for UK goods + imports rise as they are cheaper, so AD falls as BoP deficit worsens

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4
Q

Real balance effect

A

Rise in prices means are savings worth less so there is less security, meaning people want to save more, causing a contraction in AD

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5
Q

Interest rate effect on businesses and workers

A

Rising prices forces businesses to pay workers more so higher demand for money. If supply of money doesn’t change, interest rates will increase due to higher demand - more incentive to save so reduced AD

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6
Q

Marginal Propensity to consume

A

How an increase in income effects consumption

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7
Q

Marginal propensity to consume calculation

A

Change in consumption divided by a change in income

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8
Q

Average propensity to consume

A

Average amount of income spent on consumption

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9
Q

Average propensity to consume calculation

A

Total consumption divided by total income

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10
Q

Marginal propensity to save

A

How much of an increased income is saved

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11
Q

Marginal propensity to save (MPS) calculation

A

Change in savings divided by Change in income

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12
Q

Average propensity to save

A

Average amount of income saved

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13
Q

Average propensity to save calculation

A

Total savings divided by total income

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14
Q

Lower Interest rates influence on consumer spending

A

If decreases, fall in value of shared leading to a negative wealth effect lowering MPC

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15
Q

Higher interest rates effect on consumer spending

A

Increases value of shares/assets, wealth effect improves MPC

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16
Q

Confidence influence in consumer spending

A

Confidence on inflation rises consumption, decreased confidence during a recession decreases inflation

17
Q

Wealth effect on consumer spending

A

Greater wealth, greater confidence so increased consumption

18
Q

Distribution of income influence on consumption

A

Poorer have greater MPC, money goes from rich to poor consumption will increase

19
Q

What is the issue with machinery investment?

A

Machinery will lose value over time as depreciates

20
Q

Gross investment

A

Amount of money invested over time, ignores levels of depreciation

21
Q

Net investment

A

Gross investment minutes the value of depreciation

22
Q

Economic growths influence on investment

A

Increased growth raises confidence so greater investment ( and vice-versa )

23
Q

Business confidence ‘Animal Spirits’ influence on investment

A

Confident about future, investment will increase as want to prepare for the future

24
Q

Demand for exports influence on investment

A

Growth un world economy increases demand for exports showing a growth in export-led industries, increases investment in those areas which may carry onto other businesses

25
Q

Interest rates influence on investment

A

Higher the interest rates, the lower the investment as business returns must be more profitable to be beneficial

26
Q

Influence by government and regulators on consumer spending

A

Decreased regulation increases investment + policies like tax cuts increase investment

27
Q

Access to credit influence on investment

A

Less access, less investment as greater risk

28
Q

Retained profit influence on investment

A

Higher retained profit, investment will increase as security that business will pay back if fails

29
Q

Technological change influence on investment

A

Improvements in technology improved productivity, so more investment

30
Q

Costs influence on investment

A

Rise in costs increases risk of investment, so will decresse

31
Q

Trade cycle influence on government spending

A

In a recession, spend more to improve demand + reduce unemployment ( and benefits ), whereas booms spending is to decreased inflation

32
Q

Fiscal policy

A

Decisions on where government spend

33
Q

Age of population influence on government spending

A

Greater age, more spending ( pensions + healthcare )

Theme 2 Economics (8 decks)

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