Aggregate Demand and Supply

Question 1

What do models of aggregate demand and supply give?

Answer 1

They give economists another way to explain macroeconomic problems such as inflation, unemployment and growth.

Question 2

What does aggregate demand simplify to?

Answer 2

Total demand and supply.

Question 3

What is the definition of aggregate demand?

Answer 3

It is the total spending on domestic output at any given price level.

Question 4

What does rising AD mean?

Answer 4

Growing.

Question 5

What does falling AD mean?

Answer 5

Shrinking.

Question 6

What are the four components of aggregate demand?

Answer 6

Consumption
Investment
Government Spending
Net Exports

Question 7

How do you calculate net exports?

Answer 7

Exports - Imports

Question 8

How do you calculate aggregate demand?

Answer 8

Consumption + Investment + Government Spending + (Net Exports - Imports)

Question 9

Is aggregate demand normally positive or negative in the UK?

Answer 9

Negative, due to the UK having a negative balance of payments deficit.

Question 10

What will changes in price level cause?

Answer 10

Movement along aggregate demand curve.

Question 11

What can the shift by caused by?

Answer 11

fall in interest rates
cut in direct taxes
fall in exchange rate
advances in tech

Question 12

What happened to AD during the credit crunch?

Answer 12

AD fell dramatically, bank of England cut interest rates to encourage spending.

Question 13

What does ZIRP stand for?

Answer 13

Zero Interest Rate Policy

Question 14

What is MPC?

Answer 14

Marginal Propensity to Consume - refers to how much extra income will be spent.

Question 15

When may firms invest more?

Answer 15

Low Tax rate (corporation)
low interest rates
easy credit
high confidence

Question 16

What is investment a component of?

Answer 16

Aggregate Demand

Question 17

What is rising AD referred to as?

Answer 17

Actual growth.

Question 18

What is the multiplier effect?

Answer 18

Any injection will go round more than once.

Question 19

What is marginal propensity?

Answer 19

Amount of any extra injection that is used for consumption.

Question 20

What is investment?

Answer 20

Spending by firms on capital.

Question 21

What was the point in ZIRP?

Answer 21

Cheap money, pushing up investments.

Question 22

What does accelerator theory argue?

Answer 22

The level of investment in new capital goods is induced by a change in the rate of growth of national income.
As growth increases, investment increases.

Question 23

What is falling government spending called?

Answer 23

Austerity.

Question 24

What are the fiscal implications of unemployment?

Answer 24

Government Spending more for State Exports.

Question 25

Why is the multiplier effect important?

Answer 25

It means that the government can use relatively small changes in spending or taxation to bring a larger change in national output.

Question 26

What will happen when the government runs a budget deficit?

Answer 26

National debt will rise.

Question 27

When will the AD curve shift right?

Answer 27

When the budget deficit changes.

Question 28

What increases consumption?

Answer 28

Increasing house prices Increasing economic confidence.

Question 29

What increases investment?

Answer 29

Low interest rates.

Question 30

What increases exports?

Answer 30

More competitive and better at what we do.

Question 31

What is aggregate supply?

Answer 31

Total output that all producers in the economy are willing.

Question 32

What is Short Run Aggregate Supply

Answer 32

Output supplied in a time period when the level of capital is fixed.

Question 33

What is long run aggregate supply?

Answer 33

The output supplied when the economy is producing.

Question 34

What is the link between prices and firms supply?

Answer 34

Firms will be more willing to supply as prices rise.

Question 35

How do firms react to higher costs?

Answer 35

Firms are discouraged, less profit incentive.

Question 36

What do firms do when costs have fallen?

Answer 36

Firms chase profits.

Question 37

What is capital?

Answer 37

Goods that make other goods.

Question 38

What does capital expenditure simplify to?

Answer 38

Investment.

Question 39

What does the keynesian theory believre?

Answer 39

Markets fail, governments need to get involved.

Question 40

What does the free market view believe?

Answer 40

Markets work efficiently and should be left alone by governments.

Question 41

What does a right shift on a Keynesian graph show?

Answer 41

Increased maximum capacity, economic growth from yfe to yfe 1

Question 42

What is the best way to cause a right shift on Keynesian graph?

Answer 42

Investment.

Question 43

What does a right shift on the new classical curve mean?

Answer 43

Increased maximum capacity, economic growth from yfe to yfe 1.

Question 44

What do Keynesians believe that New Classicals dont?

Answer 44

We can be below Yfe in the long run.