section 2 (ad)

Question 1

aggregate demand

Answer 1

total planned expenditure on real output produced within an economy in a given period

sums up to gdp

Question 2

ad formula

Answer 2

ad = c + i + g + (x - m)

Question 3

consumption

Answer 3

spending by households on domestically produced goods and services; the biggest component of AD (56%)

Question 3

‘domestically’ meaning

Answer 3

produced in the UK

Question 4

investment

Answer 4

spending on capital goods/stock in the economy (i.e. machinery, factories, technology, and spending on human capital)

Question 5

net gov spending

Answer 5

gov expenditure less tax plus borrowing

Question 6

balance of trade

Answer 6

net exports / exports-imports (usually negative)

Question 7

y axis on ad curve

Answer 7

price level

because we are looking at the average price for all goods and services not just one product

Question 8

x axis on an ad curve

Answer 8

real output

shows the total output of an economy using real gdp (or rno, etc.) measured by years (y1, y2, etc.)

Question 9

why does ad curve slope downwards

Answer 9

real income effect

interest rate effect

the balance of trade effect

Question 10

real income effect

Answer 10

as the price level falls, the real value of income rises and consumers can buy more of what they want or need

Question 11

interest rate effect

Answer 11

at a lower price level, interest rates usually fall, and this can cause higher aggregate demand

Question 12

the balance of trade effect

Answer 12

a lower price level in the uk will make uk goods and services relatively more competitive leading to higher exports = higher gdp and demand

Question 13

what causes movements along the ad curve

Answer 13

changes in price level cause contractions/extensions

Question 14

what causes shifts in the ad curve

Answer 14

the economy growing or shrinking (controlled by aspects of ad)

Question 15

how do changes in ad impact the economy

Answer 15

they lead to short term changes in real gdp/output

Question 16

demand side economic shock

Answer 16

economic shocks are unexpected events which have a large impact on the economy

demand side shocks mean it would see a large fall in ad

Question 16

examples of demand side economic shock

Answer 16

covid
gfc
brexit
terrorist attacks
collapse in house markets
stock market crash

Question 17

what factors determine consumption

Answer 17

disposable income
falling unemployment
real wage growth
gov policies (taxes)
interest rates
consumer confidence
the wealth effect

Question 18

disposable income

Answer 18

the main source of household income is wages; disposable income is income after taxes meaning income that can be used for consumption

Question 19

how do interest rates affect consumption

Answer 19

there is an inverse relationship between interest rates and consumption

Question 20

savings

Answer 20

income that is not spent, sometimes called deferred consumption

Question 21

savings ratio

Answer 21

the % of disposable income that is saved in an economy

Question 22

savings ratio formula

Answer 22

savings ratio (%) = ( savings / disposable income ) x 100

Question 23

how does change in saving impact ad

Answer 23

savings up - consumption down - ad down savings down - consumption up - ad up

Question 24

factors that determine savings

Answer 24

disposable income levels of debt interest rates changes in welfare system age of population taxation on savings consumer confidence the wealth effect

Question 25

how does borrowing impact ad

Answer 25

borrowing up - consumption up - ad up borrowing down - consumption down - ad down

Question 26

what factors affect borrowing

Answer 26

disposable income interest rates consumer confidence levels of existing debt (high debt = harder to borrow) age (the young borrow more)

Question 27

investment

Answer 27

spending on physical capital (machinery, factories, technology, infrastructure) or human capital (education and training) done by firms not households

Question 28

what factors affect investment

Answer 28

interest rates return on investment business confidence rate of technological progress availability of credit government policies the level of spare capacity the accelerator theory

Question 29

accelerator theory

Answer 29

shows the effect of the rate of change in national income (real gdp) on investment changes on national income will see a larger than proportional change in investment

Question 30

why does accelerator theory occur

Answer 30

during a boom, firms produce more output to satisfy the increase in AD so full capacity is reached quicker with more need for replacement and capital stock for higher productivity (e.g. machines wear off quicker + need replacement when more productive) during a recession, firms have spare capacity in stock, so stock/capital is used less so does not need to be replaced or upgraded

Question 31

factors affecting net government spending

Answer 31

the economic cycle political ideology current level of gov debt (high levels = austerity measures) the ability of gov to borrow

Question 32

the multiplier

Answer 32

a change in ad leads to a larger than proportional change in national income (works also in reverse as a downwards multiplier)

Question 33

the multiplier formula

Answer 33

multiplier = change in national income/ change in injection

Question 34

marginal propensity to consume (mpc)

Answer 34

the fraction of an increase in disposable income you plan to spend

Question 35

mpc formula

Answer 35

mpc = change in consumption / change in income

Question 36

multiplier k formula (with mpc)

Answer 36

k = ( 1 / 1 - mpc )