Aggregate Demand and Aggregate Supply

Question 1

Factors Influencing Aggregate Demand

Answer 1

Consumption - Confidence, Interest Rates, Expectations
Investment - Business Confidence, Interest Rates, Expectations
Government Spending - Levels of spending and taxation
Net Exports - Exchange Rates, Trade Policies

Question 2

Factors influencing SR Aggregate Supply

Answer 2

Costs Of Raw Materials
Exchange Rates
Tax Rates
Wage Rates

Question 3

Factors influencing LR Aggregate Supply

Answer 3

Technological Advancements
Labour Productivity
Changes in Capital
Government Regulations

Question 4

What is the wealth effect?

Answer 4

As the value of people’s assets increase, people feel more financially secure, improving confidence which encourages them to consume more as opposed to save

Question 5

What is the accelerator effect?

Answer 5

Increase in consumer demand causes firms to reach near-full capacity.

This causes firms to invest to meet rising demand and increase capacity.

Question 6

Gross vs Net Investment

Answer 6

Gross Investment - Total investment excluding depreciation

Net Investment - (Gross Investment - Depreciation)

Question 7

Animal Spirits

Answer 7

Irrational and emotional behaviour that drives economic decision making

Question 8

What is the multiplier effect?

Answer 8

How much an increase in a £1 injection into the circular flow of income increases GDP

When an initial shift in AD causes multiple shifts in AD

Question 9

What impacts the size of the multiplier?

Answer 9

The level of withdrawals from the Circular Flow Of Income

(MPS, MPT, MPM)

M = 1/MPW or 1/(1-MPC)

Question 10

Actual Growth vs Potential Growth

Answer 10

Actual growth refers to the yearly increase in real Gross Domestic Product (GDP), reflecting the economy’s performance over a short period.

Potential growth represents the maximum possible output an economy can achieve when all resources are fully employed and operating efficiently