Aggregate Demand Analysis Flashcards
(23 cards)
What will a rise in price level do?
Cause output to fall because;
consumption reduced - things more expensive
Demand for exports reduced - products become less competitive
Demand for imports will increase - if prices haven’t risen abroad, imports will be cheaper
What makes AD shift right?
If there is a rise in consumption, investment, government spending or net exports that hasn’t been caused by a change in price level
Example of a shift in AD?
Reduction in income tax will cause an increase in consumers disposable income - leading to an increase in consumption, therefore meaning AD will increase
What does the outward shift mean?
At a given price level, more output can be produced, but also price lvl will increase
What happens when AD increases in regards to labour?
A derived demand - increase in AD means output increases, so demand for it will increase- more jobs created - increase in employment
What makes AD shift left?
if there’s a fall in consumption, government spending, investment or net exports that hasn’t been caused by a change in price level
What does this inward shift mean?
At a given price level, less output will be produced, but also price level will be reduced - decreased employment levels
How does the Multiplier effect affect AD?
Leads to a larger increase in AD
Injection (due to increased G) AD shifts right - Injection means the value of the initial injection is multiplied (effect)
One person’s expenditure becomes another’s income - money goes round the circular flow then leaks out - shifts further out
The bigger the multiplier the greater the shift in AD
Why is it difficult to measure the multiplier in practice?
Time lags - and the effect of the multiplier and government spending take a while to show up in an economy
eg. benefits of spending on transport
The size of it is constantly changing
What does the APC or APS show?
What happens to income
Money spent - circulates
Money Saved - withdrawn from the flow
What are the formulas for APC and APS?
APC = C / total Y
APS = amount S / total Y
What is the MPC and MPS?
Proportion of any extra income spent on C of goods and services
Proportion of any extra income saved
What are the formulas for MPC and MPS?
MPC = change in C / change in Y
MPS = change in S / change in Y
Does MPS and MPC affect the size of the multiplier, and how?
Yes, depends on either how much of an injection of money into the circular flow is spent by those receiving it and how much is saved
What will cause a greater multiplier?
If people are more likely to spend their money rather than saving it
if they save it, it does not contribute to another persons income
MPC is low, what does that mean for the multiplier?
It will be small, any increase in income will only lead to a small increase in consumption
What kind of people tend to have a higher MPC?
Those on lower incomes - struggling to afford the basics means they’ll spend any extra money they have, otherwise if they have everything, they’ll be more likely to save it
What is the equation for the Multiplier?
Multiplier = 1 / 1 - MPC
How do you work out the total increase in national income?
size of injection x multiplier
What else other than MPC can you use to work out the Multiplier?
MPW (withdrawal)
What is the MPW?
proportion of new income that’s withdrawn from the economy
eg. saved, paid as taxes, import goods from abroad
What is the formula for MPW?
MPW = MPS + MPT + MPM
Formula for the Multiplier using MPW?
MPC + MPW = 1
SO
Multiplier = 1 / MPW
