macroeconomics 2.2 Flashcards
(29 cards)
What are the components of AD?
AD = C + I + G + (X - M)
What are the components of Aggregate Demand in detail?
CONSUMPTION = Consumer Spending o goods and services.
INVESTMENT = Spending of businesses on capital goods.
GOVERNMENT SPENDING = Spending by the government to produce goods and services (generally for public use).
NET EXPORTS = Goods sold from in the country abroad - goods bought by the country from abroad.
What is the AD curve?
the AD curve is a downwards sloping curve, demonstrating how, when prices rise, Real GDP decreases.
Income Effect?
Income effect: As a rise in prices is not matched straight away by a rise in income,people have lower real incomes so can afford to buy less, leading to a contraction in demand.
Substitution Effect?
Substitution effect: If prices in the UK rise, less foreigners will want to buy British exports and more UK residents will want to buy imported foreign goods because they are cheaper. The rise in imports and fall of exports will decrease net exports so AD will contract.
Real balance effect?
Real balance effect : A rise in prices will mean that the amount people have saved up will no longer be worth as much and so will offer less security. As a result, they will want to save more and so reduce their spending, causing a contraction in AD.
Interest rate effect?
Interest rate effect: Rising prices mean firms have to pay their workers more and so there is higher demand for money. If supply stays the same, then the ‘price of money’ i.e. interest rates will rise because of this higher demand. Higher interest rates mean that more people will save and less will borrow and will also mean that businesses invest less, so AD will contract.
What is Disposable Income?
Disposable income (Y) is the money consumers have left to spend , after taxes have been taken away and any state benefits have been added. This is the main factor of consumption.
What is Marginal Propensity to Consume?
how much an increase in income affects consumption.
MPC formula?
change in consumption/change in income.
What is Average propensity to consume?
The average amount spent on
consumption out of total income.
APC formula?
Total consumption/Total income.
What is the relationship between savings and consumption?
Savings is what is not spent out of income. An increase in consumption decreases savings so the same factors which affect consumption are those which affect savings- but in the opposite way. For example, a rise in confidence will decrease savings.
What are the other influences on consumption?
Interest rates.
consumer confidence.
wealth effects.
Distribution of income.
Tastes and fashion.
What is the difference between gross and net investment?
Gross investment is the original value of a capital good. Net investment is the value of a capital good after depreciation.
what is the formula for net investment?
Net investment = Gross Investment - depreciation.
what is needed ( investment wise) for economic growth?
Business confidence - they must be willing to invest in capital goods to increase production in order to meet growing demand.
How do interest rates effect investment?
An increase in interest rates will make it more expensive for firms to borrow money. This means that they will be less likely to borrow money and therefore invest.
How does the demand for exports effect investment?
The demand for exports increases investment because it will cause exporting businesses to need to invest more to meet production with demand - increasing investment.
Keynes - animal spirits ?
Idea that businesses would invest more if they were positive about the future.
How does access to credit effect investment?
If banks are wary that an investment is risky, firms will get lass access to credit and will have to pay higher interest rates - as banks fear they wont be able to pay them back. As a result, it reduces business confidence.
How does the influence of Government and regulations effect investment?
Government can introduce tax breaks in order to encourage investment. Also, generally, more regulated governments see less investment.
How does the trade cycle effect government expenditure?
During a boom, gov will spend less in order to maintain inflation. During a recession, gov will increase spending in order to help grow the economy (increased jobs etc).
How does fiscal policy effect government spending?
This policy determines what gov is going to spend money on each year.
