Key terms AD/AS

Question 1

Aggregate Demand

Answer 1

The value of total demand for final goods and services in an economy at a given time. AD = C+I+ G+(X-M)

Question 2

Aggregate Supply

Answer 2

The value of total supply of final goods and services in an economy at a given time.

Question 3

Average propensity to consume

Answer 3

The percentage of total income that households spend on domestic goods and services

Question 4

Average propensity to import

Answer 4

The percentage of total income that households spend on imports

Question 5

Average propensity to save (savings ratio)

Answer 5

The percentage of total income that households spend on saving

Question 6

Average propensity to tax

Answer 6

The percentage of total income that households pay in taxes

Question 7

Black markets

Answer 7

Unofficial and unrecorded, often illegal, trading that is not counted when estimates of size of aggregate demand and aggregate supply are made

Question 8

Capital Accumulation

Answer 8

Investment that increases the total stock of capital in the economy

Question 9

Capital Consumption

Answer 9

A reduction in the total stock of capital. Often known as depreciation

Question 10

Capital Expenditure

Answer 10

Money spent by the government on adding to the capital stock, eg building roads

Question 11

Capital Stock

Answer 11

The total value of productive machinery and tools used in production in an economy

Question 12

Capital: Output Ratio

Answer 12

The relative size of the amount of capital stock that is needed in order to create the desired level of output

Question 13

Circular flow of income

Answer 13

The total value of money revolving around the economy in a period of time

Question 14

Classical aggregate supply

Answer 14

In the short run the aggregate supply curve is upward sloping and in the long run it is vertical

Question 15

Consumption

Answer 15

The total value of all money spent by consumers on UK goods & services

Question 16

Current government expenditure

Answer 16

Money spent by the government on the day to day running of the government. It includes things like welfare benefits and repairs to infrastructure but not building new infrastructure.

Question 17

Depreciation (investment)

Answer 17

The reduction in the value of an asset over a period of time.

Question 18

Discretionary Expenditure

Answer 18

Money spent by the government over which it has choice and it is easy to change how much it spends

Question 19

Disposable income

Answer 19

Consumer income remaining after deduction of taxes and social security benefits are added, available to be spent or saved as the consumer chooses

Question 20

Exchange Rates

Answer 20

A price or rate at which one currency is changed for another. It tells you how much foreign money you can buy with £1.

Question 21

Exports

Answer 21

Goods and services sold BY UK people TO foreign people

Question 22

Financial transactions

Answer 22

Spending by the government on buying shares in failed banks, lending money to businesses, lending money to other countries

Question 23

Fixed capital formation

Answer 23

The process of a firm increasing its stock of assets used in the productive process. It means the same things as capital accumulation but for just an individual firm

Question 24

Full capacity

Answer 24

The maximum output possible in an economy with all available resources being used in their most efficient uses

Question 25

Government Spending

Answer 25

Goods and services bought by the government that are paid for through taxes and borrowing

Question 26

Infrastructure

Answer 26

The human made environment eg roads, railways, buildings, housing

Question 27

Injections

Answer 27

Money added to the circular flow of income, which increases aggregate demand

Question 28

Investment

Answer 28

Spending by firms on creating new capital equipment

Question 29

Keynesian Aggregate supply

Answer 29

In the short run the aggregate supply curve is horizontal and in the long run it is vertical

Question 30

Life cycle hypothesis of consumption

Answer 30

A theory developed by Franco Modigliani in 1957. It states that individuals seek to smooth consumption over the course of a lifetime – borrowing in times of low-income and saving during periods of high income.

Question 31

LRAS

Answer 31

Long run aggregate supply. This is the full capacity of the economy

Question 32

Macro economic equilibrium condition

Answer 32

Where total injections into the circular flow are equal to the total withdrawals from it so that there is no incentive for GDP to change

Question 33

Mandatory Government expenditure

Answer 33

Money spent by the government that cannot easily be changes because it would need a change in the law eg welfare benefits

Question 34

Marginal efficiency of capital

Answer 34

The expected rate of return on money spent on an investment

Question 35

Marginal propensity to consume

Answer 35

The proportion of an extra amount of income that is spent on domestic consumption goods

Question 36

Marginal propensity to tax

Answer 36

The proportion of an extra amount of income that is taxed and so is taken out of the circular flow of income

Question 37

Marginal Propensity to Withdraw

Answer 37

The proportion of an extra amount of income that is not spent and so is taken out of the circular flow of income

Question 38

Money wages

Answer 38

The nominal value of wages paid to employees that form part of the costs of a business

Question 39

Permanent income hypothesis of consumption

Answer 39

The idea that people will spend money at a level consistent with their expected long term average income so that even if this means that they have to borrow now they expect to be able to afford it later.

Question 40

Productivity

Answer 40

Output per worker per period of time

Question 41

Real wages

Answer 41

The nominal value of wages paid to employees, that form part of the costs of a business, reduced to take into account the effects of changes in prices

Question 42

Real Values

Answer 42

Items valued in money terms that have had their value reduced to reflect changes in prices over time

Question 43

Saving

Answer 43

The act of putting money somewhere safe to keep for a future date

Question 44

Savings

Answer 44

The stock of all money that has been put away somewhere safe to keep for a future date

Question 45

SRAS

Answer 45

Short run aggregate supply. This is the total supply of final goods and services in an economy at a given time.

Question 46

Sticky wages

Answer 46

A situation where wages do not respond to changes in the supply of and demand for labour. It is most often associated with wages not falling in a recession in order to clear unemployment

Question 47

The accelerator (effect)

Answer 47

Where an increase in national income (GDP) results in a proportionately larger rise in the capital stock

Question 48

The multiplier (effect)

Answer 48

Where an increase in injections to the circular flow of income results in a proportionately larger rise in GDP

Question 49

The wealth effect

Answer 49

Where an increase in the value of an asset that you own makes you feel richer so that you spend more money

Question 50

Transfers / transfer payments

Answer 50

A payment made or income received in which no goods or services are being paid for, such as a welfare benefit payment or subsidy

Question 51

Withdrawals

Answer 51

Money taken out of the circular flow of income, which decreases aggregate demand