Macroeconomics > Aggregate Demand > Flashcards

Aggregate Demand Flashcards

(50 cards)

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1
Q

word definition of aggregate demand

A

the total amount of goods and services within a particular market at a given price level

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2
Q

formula of aggregate demand

A

C + G + I + (X-M)

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3
Q

what are the components of aggregate demand

A
  • consumption
  • investment
  • government spending
  • net exports
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4
Q

what is the price level

A

the average of current prices across the entire spectrum of goods and services produced in an economy

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5
Q

what causes a contraction or expansion along the AD curve

A

change in price level

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6
Q

what causes a shift in the AD curve

A

change in component of AD

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7
Q

what does consumption mean

A

household spending on goods and servives

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8
Q

what does government spending mean

A

spending by governments of goods + services. DOESN’T include transfer payments

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9
Q

what does investments mean

A

spending on fixed or working capital

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10
Q

what does net exports mean

A

all money earnt from selling exports - all money earned from buying imports

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11
Q

what 8 factors affect consumption

A
  • wealth effect
  • consumer confidence
  • income taxes
  • availability of credit
  • population
  • interest rates
  • expectation of inflation
  • employment
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12
Q

what is consumer confidence

A

measures the degree of optimism that consumers feel about the overall state of economy and their personal financials situation

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13
Q

what is disposable income

A

income after tax and bills

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14
Q

what is a recession

A

two successive quarters of GDP falling

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15
Q

what is gross investment

A

gross investment is before depreciation. it is the total spending by businesses on capital expenditure

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16
Q

what is net investment

A

takes into account depreciation

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17
Q

what is the accelerator effect

A
  • increase consumption requires more production by firms to reach the household demand
  • firms decide to increase their capacity and so spending on capital expenditure increases (leads back to an increase in consumption)
  • when firms increase their capacity as a result of increased in C = accelerator effect
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18
Q

what is the paradox of thrift

A

consumers = decrease C and increase savings
firms = postpone investment
higher savings and reduced investments both have the effect of reducing demand and incomes in the circular flow, causing aggregate demand to fall. banks more willing to make loans.

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19
Q

what are the 7 factors effecting investment

A
  • business expectations and confidence
  • interest rates
  • demand for exports
  • rate of economic growth
  • ‘animal spirits’
  • access to credit
  • the influence of government and regulations
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20
Q

what does ‘animal spirits mean’

A

emphasise the importance of confidence and the ‘gut instinct’ of firms

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21
Q

what is a budget deficit

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A

when government spending exceeds the tax revenue

22
Q

what is a budget surplus

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A

when tax revenue exceed the government spending

23
Q

what does stopping austerity do

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A

stopping government spending decreasing and reducing taxes

24
Q

what happens to government spending in an economic boom

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A
  • increase spending as they would have higher tax receipts - increase their popularity
  • spend less on benefits and transfer payments (more households will be employed)
25
what happens to government spending in an recession
- increase spending on transfer payments - decrease in tax receipts from household and firms
26
what is a trade surplus
when value of exports > value of imports
27
what is a trade deficit
when value of imports > value of exporte
28
what is specific tax
tax that only falls on the quantity sold and not on the fixed fee
29
what is ad valorem tax
taxes fall on both the fixed fee and the price per unit
30
if a good is price elastic what will the impact be on government tax revenue if there is a tax added on the good?
the entirety of the tax will be borne by the consumer. the government tax revenue will decrease due to then higher price of the good
31
what is hedging
a strategy that tries to limit risks in financial assets by buying or selling an investment to potentially help reduce the risk of loss of an existing position
32
what does ‘unwinding the hedge’ mean
refers to the closing trade that requires multiple steps, trade or time
33
what is an exchange rate
the value of a currency in comparison to other countries
34
what does SPICED stand for
Strong Pound Imports Cheaper Exports Dearer (expensive)
35
what is relative inflation
- relative to other countries - if inflation is low, relative to other countries, then it is likely that our exports will be cheaper and more price competitive
36
what are the factors affecting the price of net trade
- exchange rates - relative inflation - costs of production
37
how does costs of production effect net trade
- cop increase = price of exports increase - price of exports increase unless exporters accept a cut in profits - countries without minimum wage posses a cost advantage over uk firsm
38
what are non-price factors that affect net trade (demand for exports)
- quality/reliability - after sales service - fashions/trends - appearances - innovation - brand
39
what is the marginal propensity to import
for every addition £ earned, how much is spent on imported goods
40
what are the multiplier effect formulas
1. 1/1-MPC 2. 1/MPW
41
what is MPC
marginal propensity to consume - for every additional £ earned, how much is spend through consumption
42
what is MPW made out of
MPM + MPT + MPS
43
what does trickle down economics rely on
low income households will have a MPC that is close to 1
44
what is the multiplier effect
- when an initial change in aggregate demand has a much greater final impact on national income - it comes about because an injection to the circular flow of income stimulates further rounds of spending - the multiplier effect can occur when any of the components of AD initially increase due to an injection
45
evaluate the multiplier effect
when MPC is low, each round of spending will be less. therefore if spending is low, the income for the next person will be lower
46
what is the laffer curve
tax revenue by tax rate - supports trickle down economics: by reducing tax rates you increase tax revenue
47
what is a negative output gap
when actual output is less than potential output
48
what are the effects of a negative output gap
1. high unemployment rates 2. low economic growth 3. inflation - disinflation or deflation
49
what is a positive output gap
when actual output is greater than potential output
50
what is the effect of a positive output gap
1. inflation 2. increasing current account deficit (trade deficit) - ^MPC - ^M - vAD 3. unsustainable
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