Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Macroeconomics - A Level > Aggregate Demand > Flashcards

Aggregate Demand Flashcards

1
Q

Aggregate demand define

A

The total demand for a country’s goods and services at a given price level and in a given time period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Price level define

A

The average of each other prices of as the products produced in an economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

AD equation

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Real GDP define

A

The country’s output measured in constant prices as so adjusted for inflation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Consumer expenditure define

A

Spending by households on domestic consumer products

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Investment definition

A

Business and government spending on capital goods.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Government spending define

A

Current expenditure by the central government and local government on goods and services e.g. Spending on teachers’ pay, nurses, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Exports define

A

The value of goods and services sold abroad.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Imports define

A

The value of goods and services bought from abroad

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Net exports define

A

The value of exports minus the value of important.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What does the AD curve show?

A

AD curve shows the relationship et week aggregate demand and the general price level in the economy, that is, as the general price level rises, AD falls, ceteris paribus. As the general price level fall, AD rises ceteris paribus. There is an inverse relationship between the price level and AD.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Why is there an inverse relationship between the general price level in the economy and aggregate demand?

A
  • real money balances effect

- interest rate effect

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Real money balances effect

A

The lower the average domestic price level, the more a fine money income / stock of savings will buy. Therefore, consumption / AD is higher.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Interest rate effect

A

If in the UK the general price level falls, this causes a decrease in the demand for money and a consequential fall in interest eyes with an expansionary effect in the entire economy, this is reflected in an increase in AD.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Effect of a rise in the general domestic price level on AD.

A

Increase price

Decrease in real output

(Due to increase in average domestic price, e.g. Did to high interest rates).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

10% increase in average income may not result in 10% increase in consumer expenditure

A

Increase by 10% if the marginal propensity to consume is less than 1. They do not spend as they are spending. MPS higher than 0.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Determinants of consumption

A
  • Real disposable income
  • availability of credit
  • household wealth
  • interest rates
  • consumer confidence
  • the distribution of income and marginal propensity to consume
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Real disposable income

A

An increase in real disposable income will lead to an increase in consumer expenditure and vice versa.

Consumer spending rises because the demand for all normal goods rises as incomes rise.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Household wealth

A

Higher wealth, e.g. Savings, shares, etc. Tends to lead to higher spending. This is because savings can be spent and more can be borrow against the value of other assets, such as a house.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Define income

A

A flow.

E.g. Dividends, wages, etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Wealth

A

Is a stock/ asset

E.g. Land, jewellery, property.

22
Q

Interest rates

A

Fall in interest rates can lead to an increase in consumer spending and an increase in interest rates can lead to a fall in consumer spending. Because:

  1. Discretionary income. Mortgages rises if interest rates are cut, because they pay less.
  2. If interest rates fall the cost of credit falls leading to an increase in borrowing and credit spending.
  3. The incentive to save is reduced if interest rates fall. Vice versa.
23
Q

The availability of credit

A

Even if the Bank of England cigs the base rage of interest, if banks are unwilling to lend (e.g. Credit crunch) consumers will not be able to get access to credit to increase spending.

24
Q

Consumer confidence

A

Low unemployment and greater job security or an increase in household wealth will make people more confident in their future.

25
Q

The distribution of income and marginal propensity to consume.

A

People on higher incomes are likely to save and those on lower incomes who are more likely to spend a higher proportion of their income and therefore low income groups have a higher MPC.

26
Q

Determinants of investment expenditure

A
  • interest rates
  • business confidence / expectations
  • increases in the growth rate of real GDP
  • corporate tax rates
  • current capacity utilisation rates
  • price of capital equipment
  • advances in technology
27
Q

Investment expenditure

Interest rates

A

Lower unrest rates may lead to higher investment expenditure by firms and higher interest rates may lead to lower investment expenditure because:

When interest rates are raised, the cost of borrowing to invest has increased, therefore firms borrow less for the purpose of investment.

The rate of return on retained profits held in interest bearing accounts will increase, this means that firms are less likely to use retained profit for investment and more likely to save.

28
Q

Business confidence / expectations

A

If businesses are confidence about future levels of demand economic growth, future interest rates and expect high real rate of return on investment projects / investment should rise.

29
Q

Investment determinants

Increases in the growth of real GDP

A

Higher real growth rates in the previous year may lead to an acceleration in the rate of investment in the following year, so that firms can expand capacity to meet higher levels of demand arising from higher income.

30
Q

Determinants of investment

Corporate tax rates

A

A reduction in corporate faces increase firm’s post tax profits. Firms can tear in more profit and so fun increased investment out of higher retained profits.

31
Q

Current capacity utilisation rates

A

If firms are operating at below full capacity, they are less likely to I rag, however, if they are writing at full capacity they may have to invest in order to increase output further.

32
Q

Price of capital equipment

Investment determinants

A

If the price of capital equipment falls, a for is more willing and able to buy it and so investment would likely increase.

33
Q

Investment determinants

Advances in technology

A

Advances in technology will not only increase productive capacity but might encourage firms to accelerate the Faye of investment in order to remain competitive as rivals innovate the new technology.

34
Q

Determinants of government spending

A

Political factors

Cyclical factors

War

35
Q

Determinants of government

Political factors

A

Political hyperopia: government spending may be more likely to decrease shortly after an election.

Political myopia: government spending may increase in the run-up to an election.

36
Q

Cyclical factors

Government spending

A

During a recession government may increase it’s spending. E.g. On education or health care or other public services by creating more jobs in the public sector this helps to increase AD, employment, etc.

During periods of rising inflation the government may cut it’s spending to reduce upside pressure on prices.

37
Q

Government determinants

War

A

War time government expenditure tends to be higher than peace time e.g. Afghanistan

38
Q

Determinants of net exports

A

International competitiveness of Uk goods

Exchange rates

Real disposable income abroad

The domestic rate of inflation / price level

The extent to which barkers to trade exist in the markets of our trading partners.

39
Q

Exports increase

A

AD increases

40
Q

If imports increase

A

AD decreases

41
Q

If exports decrease

A

AD decreases

42
Q

If imports decrease:

A

AD will increase

43
Q

Net exports determinants

International competitiveness of UK goods

A

If uk goods are price competitive and of the right quality / design, UK exports may rise and imports may fall, is so net exports rise. This will lead to an increase in AD.

44
Q

Determinants of net exports

Exchange rates

A

An increase in the strength of the pound exchange rate leads to an increase the relative price of Uk exports and a fall in the relative price of imports to the UK. Therefore, exports would fall an imports would rise.

45
Q

Exchange rate calculations

A

X - away from home

Divide - back home

46
Q

Stronger pound

A

Price imports ⬇️
Price exports ⬆️
Demand for imports ⬆️
Demand for exports ⬇️

AD ⬇️

47
Q

Weaker pound

A

Price of imports ⬆️
Price of exports ⬇️
Demand for imports ⬇️
Demand for exports ⬆️

AD ⬆️

48
Q

Real disposable income abroad

A

A rise in disposable income abroad may lead to an increase in demand for Uk goods and a fall in demand if disposable income abroad falls.

49
Q

The domestic rate of inflation / price level

A 
UK inflation ⬆️
Other economies ➡️
UK prices ⬆️
UK competitiveness ⬇️
Exports ⬇️
Imports ⬆️
Net ⬇️
AD ⬇️
50
Q

The extent to which barriers to trade exist in the markets of our trading partners.

A

If there are barriers to trade e.g. Tariffs. It will reduce UK exports.

51
Q

Aggregate define

A

Overall / sum of multiple parts

Macroeconomics - A Level (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions