Economics IA4

Aggregate Demand

the total demand for all finished goods and services in an economy at any price level at any given point in time.

Formula for aggregate demand

AD = C + I + G + (X-M)

Formula for real GDP

Real GDP = Nominal GDP/CPI x 100

Define Nominal GDP

considers market value of these produces, influenced by inflation

Define real GDP

adjusts the prices of these goods and services for inflation, more accurate indication of an economy’s production

If the AD curve shifts to the right

new equilibrium price and quantity both increased, expansion along the AS curve

Define multiplier effect

how an autonomous change in AD sees a greater than proportional change in national income

Autonomous factors include

consumption, investment, gov. spending, net exports

Define marginal propensity to consume

proportion of any increase in income spent on consumption

Define marginal propensity to save

proportion of any increase in income that is saved

Formula for calculating multiplier

MPC + MPS = 1

Formula for MPC

consumption/income

Formula for MPS

savings/income

Formula for finding the multiplier

k = 1/1-MPC or k= 1/MPS

Define demand-side economic growth

economic growth occurring due to an increase in AD

What is consumption affected by

disposable income, consumer expectations, and interest rates

With higher income tax…

less disposable income and consumption, lower economic growth

What do interest rates directly effect?

cost of borrowing, return on savings

What is investment affected by

business profits, expectations, and interest rates

What was the primary economic object for the Aus Gov in 2021

high employment

How does gov sector stimulate economy

decrease tax, increase expenditure

How do gov sector contract economy

increase tax decrease expenditure

Net Exports when economy is weak

import less, export more, increase economic grwoth.

Net exports when economy is strong

more imports, less exports, decreased economic growth

A strong domestic exchange rate…

decreases exports, increases imports, decrease in economic growth

A weaker exchange rate…

increase exports, decrease imports, increase economic growth

Causes of supply-side growth

quantity of new resources, improvements in technology, and microeconomic reform.

Benefits of economic growth

increased living standards, gov budget, innovation, and employment

Disadvantages of economic growth

Income inequality, inflation, environment sustainability, and external stability