Macro Concepts

Question 1

What is Aggregate Demand?

Answer 1

Total spending on goods and services in an economy at a given price level and time.

Question 2

What are the components of Aggregate Demand?

Answer 2

C + I + G + (X – M)
C = Consumer spending
I = Investment
G = Government spending
X = Exports
M = Imports

Question 3

What is Aggregate Supply?

Answer 3

The total amount of goods and services firms are willing to produce and sell at a given price level.

Question 4

What’s the difference between Short-Run AS and Long-Run AS?

Answer 4

Short-Run AS (SRAS): Affected by changes in production costs.
Long-Run AS (LRAS): Shows full employment output – affected by productivity, skills, tech.

Question 5

What shifts the AD curve?

Answer 5

Changes in any of the components:

More consumer or government spending
Changes in investment or exports/imports

Question 6

What shifts the AS curve?

Answer 6

Cost of production (e.g. wages, raw materials)
Productivity
Technology improvements
Supply-side policies

Question 7

What is the multiplier effect?

Answer 7

When an initial increase in spending leads to a larger increase in national income.

Question 8

What’s the formula for the multiplier?

Answer 8

Multiplier = 1 / (1 – MPC)

Question 9

If the government spends £100m and the MPC is 0.8, what’s the multiplier? What is the total increase in income?

Answer 9

Multiplier = 1 / (1 – 0.8) = 5
Total increase in income = £100m x 5 = £500m

Question 10

Why does the multiplier matter?

Answer 10

It shows how government spending or investment can have a bigger impact on the economy.