2.2 2.3 aggregrate demand aggregate supply

difference between a movement and a shift on a curve

When the curve is affected due to the price change, we see a movement along the curve. However, when the curve is affected due to any change other than any change in the price of a given product, we see the shift of the curve itself.

how does disposable income effect consumer spending

- Consumers are likely to buy non-essential items when they have extra income.

- Lower disposable income can lead to reduced spending, causing consumers to prioritize necessities.

- Changes in disposable income can significantly impact overall economic growth and demand in the market.

how can the rate if savings effect consumer spending

- Higher savings rates can lead to reduced consumer spending as individuals hold back on purchases to save more.

- When consumers prioritize saving, demand for goods and services may decline, impacting businesses.

- Conversely, lower savings rates may boost consumer spending, as people are more willing to spend their income

how can interest rates effect consumer spending

- Lower interest rates reduce borrowing costs, encouraging consumers to take loans and spend more.

- Higher interest rates increase borrowing costs, which can lead to decreased consumer spending and lower demand for goods and services.

- Changes in interest rates can influence consumer confidence and willingness to make large purchases, like homes and cars

how can consumer confidence effect consumer spending

- High consumer confidence generally leads to increased consumer spending, as people feel secure in their financial situation.

- When consumers are optimistic about the economy, they are more likely to make larger purchases.

- Low consumer confidence can result in reduced spending, as individuals may prioritize saving in uncertain times.

how does economic performance of other nations impact the UK

The slow growth of the Eurozone in 2012 to 2014 affected the UK's export sales (we require demand from Europe for our financial services)

difference between gross investment and net investment

- Gross investment is the total money spent on new assets.

- Net investment is what’s left after accounting for the loss of value in old assets.

- So, gross shows total spending, and net shows real growth.

how does the rate of economic growth effect investment

- Higher economic growth boosts investment due to expected demand.

- Strong growth increases business confidence and spending.

- Low growth makes businesses hesitant to invest.

how does business confidence effect investment

- High confidence boosts investment.

- Firms expand when they feel secure.

- Low confidence holds back investment.

- Confidence is crucial for investment decisions.

how does animal spirits effect investment

- Animal spirits influence investment through emotions.

- High spirits boost investment due to optimism.

- Low spirits lead to cautious investment.

- They significantly shape investment trends.

how does demand for exports influence investment

- High export demand boosts investment.

- Firms invest to increase production capacity.

- Low demand can reduce investment.

how do interest rates influence investment

- Low rates lower borrowing costs, encouraging investment.

- High rates increase costs, deterring investment.

- The relationship affects overall economic growth.

how does access to credit influence investment

- Easy access encourages borrowing for projects and expansion.

- Limited access restricts investment opportunities.

- Overall, credit availability affects business growth.

how do government regulations influence investment

- Favorable regulations can encourage more investment.

- Strict regulations may increase costs and deter investment.

how does real income effect trade balance

- Higher Real Income: Boosts imports, worsening trade balance.

- Lower Real Income: Reduces imports, improving trade balance.

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how do exchange rates effect trade balance

- Strong Currency: Exports more expensive; imports cheaper, worsening trade balance.

- Weak Currency: Exports cheaper; imports more expensive, improving trade balance.

- Inflation: Higher inflation can weaken currency, affecting trade dynamics. .

how does state of world economy effect the trade balance

- Global Demand: Increases exports, improves trade balance.

- Recessions: Decrease demand, worsen trade balance.

- Trade Agreements: Influence trade balance positively or negatively.

how does degree of protectionism effect trade balance

- High Protectionism: Reduces imports, can improve trade balance.

- Tariffs: Increase costs of imports, encouraging local consumption.

- Trade Barriers: Limit foreign competition, benefiting domestic localities

how do non price factors influence the trade balance

- Quality: Higher quality goods attract more exports.

- Brand Reputation: Strong brands can boost sales overseas.

- Consumer Preferences: Changes in tastes affect import and export levels.

how many work visas issued in 2023

just under 500,000!

what will influence the SRAS of an economy (5)

- Changes in production costs (wages, raw materials)

- Supply chain disruptions (natural disasters, pandemics)

- Government policies (taxes, subsidies)

- Changes in technology (improvements or setbacks)

- Seasonal factors affecting production

effect on higher wages on SRAS

- Increased production costs for businesses

- Potential decrease in short run aggregate supply (SRAS)

- Could incentivize firms to invest in labor-saving technology in the long run

a fall in cost of raw materials on SRAS

- Lower production costs

- Increase in short run aggregate supply (SRAS)

- Potential for lower prices and higher demand

- Encourages expansion and hiring for firms

a rise in the value of pound on SRAS

- Increased cost of exports

- Decreased competitiveness of domestic goods abroad

- Potential decrease in short run aggregate supply (SRAS)

- Lower import costs may benefit consumers

- Could lead to trade balance adjustments

a fall in productivity on SRAS

- Increased production costs

- Decrease in short run aggregate supply (SRAS)

- Lower output levels for businesses

- Potential for higher prices due to reduced supply

- May lead to inflationary pressures in the economy

define short run aggregate supply

SRAS is the total output of goods and services at a given price level, with some factors of production fixed. It can change with demand and productivity.

define LRAS

Long-run aggregate supply (LRAS) is the total output an economy can produce when resources are fully utilized, unaffected by the price level.

how do technological advances influence the LRAS of an economy

- Increasing productivity through more efficient production.

- Reducing production costs, encouraging output expansion.

- Creating new products and markets, shifting the LRAS right.

- Enhancing labor force efficiency, leading to higher output.

how will increases in the level of productivity influence LRAS

allowing more output with the same resources.

- Shifts LRAS to the right, indicating higher potential output.

- Stimulates economic growth and improves living standards.

- Enhances overall efficiency in the economy.

how does improving standards of education and skills in an economy effect LRAS

- Enhances workforce productivity, leading to increased output.

- Shifts LRAS to the right, indicating higher potential economic growth.

- Fosters innovation and adaptability in the labor market.

- Contributes to higher living standards and economic stability.

how does a rise in migration of working age people influence LRAS of an economy

- Increases the labor supply, providing more workers for businesses.

- Shifts LRAS to the right, indicating higher potential output.

- Stimulates economic growth through increased consumption and demand.

why may a government value happiness

happiness includes the quality of life rather than the income alone. Government policy can have a significant impact on happiness, for example, by spending money on sporting and leisure facilities. Happiness may be associated with a more productive economy.

how does access to borrowing on credit cards affect consumer consumption

When consumers can borrow on credit, they are able to spend more than their current income allows.leads to higher spending on goods and services. However, if borrowing becomes excessive, it can lead to debt potentially reducing future consumption as consumers allocate more income toward repaying credit card debt.

aggregate demand

I + C + G + (X-M)

C - 60 % of AD

Classical LRAS

Keynesian LRAS – rise in AD

evaluation against the wealth effect

Does the wealth effect even exist?
in the UK only 50% of homeowners own their house, the other 50% are renting or saving, therefore that 50% actually increase their savings when wealth increases!

Explain the difference between a movement along the AD curve and a shift of the AD curve

• A movement along the AD curve occurs when there is a change in the price level. E.g., a fall in the price level causes an expansion in AD.

• A shift of the AD curve happens when there is a change in a non-price factor, such as a rise in government spending, which shifts AD to the right.

Explain how increased business confidence might affect aggregate demand.

When business confidence is high, firms are more likely to invest in new projects, expecting future returns. This increases investment (I), which is a component of AD, causing AD to rise.

Discuss one reason why an increase in government spending may not result in a large increase in aggregate demand.

If the increase in government spending is offset by higher taxes or cuts elsewhere, the overall impact on AD may be limited. Alternatively, if the economy is already at full capacity, increased government spending may cause inflation rather than real output growth.

what is fiscal drag

It is the phenomenon where wage and salary increases due to inflation push individuals into higher income tax brackets, resulting in a larger portion of their income being taxed at a higher rate, even without a real increase in their purchasing power