Aggregate Demand Textbook

why is the AD curve downward sloping

a rise in price level will lead to a fall in the equilibrium level of national income

formula for AD

AD = C+I+G+(X_M)

what is the price level in the AD curve

average level of prices in the econ

what is inflation

any change in price level

what happens when prices rise ( in terms of demand)

less goods and services would be demanded

explain why the AD curve is donward sloping, in terms of a household on fixed income

because if there income does not rise as price level rises, they can afford to buy less goods and services.

the same can be applied to the national econoamy

describe how interest rates rises begining with prices rising

1. people cant buy as much as they used to

2. to be able to buy as much as they used to, they would have to borrow money

3. assuming there is a fixed amount of money to borrow and more demand for it, the cost of borrowing rises

4. that cost of borrowing is called intrest rate

what happens when intrest rate rise

less demand

what happens when prices rises, but firms want to invest

they borrow money to invest

in terms of interest rates, if they rise then investment becomes less ____

profitable

what happens when investment is less profitable

less firms invest

SPICED

strong pound import cheap export dear

WPIDEC

weak pound import dear export cheap

if UK price level rises, but prices around the world remains the same, then this make UK products less ___

competitive

what happens to imports and exports in the UK when prices in the UK rises, but remains the same around the world

more imports, less exports

what are the 2 type of variable effect on AD curve

1. real variable

2. monetary variable

what is a real variable

affect changes in willingness to buy

what is monetary variable

change in interests rates

Factors that affect consumption STUNIS and explain how each affects consumption

Stock market prices

tax

unemployment

new tech

inrests rates

saving money

factors that affect investment SICC

state of the econamy

interest rates

coporate tax

confidence

how does gov spending affect shift in AD curve (think tax and spending)

if goverment spend more, but no change in tax, then AD curve shift right vice versa

what happens if there is an improvement in the innovation and quality of UK goods

move the AD curve

if it is a shift along the curve then it is a

price change

if the curve shifts then … causing AD to be ….

other variable than price changes, causing AD to be different at every price level

in more basic terms what does the AD curve actually shows

for each price level, how much real world output demanded

absolute changes vs rate of change

absolute is like investement falls

rate of change is like investment still go up, but less investment

what is savings

what is not spent out of income

in an econamy what is the MPC normally between

0 and 1

what does it mean for MPC to be more than 1 2 option

1. either the household is borrowing

2. or running down savings

what is the consumption function?

relationship between consumption and factors that affect it

what do Keynesians say about poor ppl

more likely to spend

what do Keynesians say about rise income and savings and consumption

when income rises, consumption rises, and saving rises

what do Keynesians say about increasing consumption based on the 2 things they assume

distribute wealth from the rich to poor

what affects MPC (CIA TAIWAN)

Wealth effect 

Income level 

Consumer Confidence

Interest rates

Trends

Age

Stock price

Availability of Credit

Inflation

how does stock affect consumption

if stock value go down household value also go down

give a chain of reasoning about how consumer confidence affects consumption

1. if there is a recession people might worry they loose job

2. so they spend less on non essentials to save more just incase

3. consumption goes down

what are 2 factors that affect wealth in short period of time and why

1. value of your house : use as collateral to boorrow more

2. stocks value increase : sell it for more money

what is the wealth of households made up of

physical wealth eg house or car

monetary wealth eg cash, stocks

if there is more credit then

people can borrow more to spend

how do young people spend and why and they often go into ___

more

as they need to buy house and build family, so they often go into debt finance

middle age people tend to spend _ and why

less as they have to save up for retirement

old people tend to spend _ as

more as they tend to supplement their pension by running down on savings

how does inflation affect consumption because (what does inflation do to money)

if households know that there will be inflation in future then they will spend more

inflation erode the real value of money

income does not affect _ as much

savings

what is savings

wealth accumulated over a period of time

what is saving

flow concept which take place over a period time

in basic terms what is the difference between savings and investment

in investment something should be produced

if interest rate is high, then what happens to investment and why

investment decreases because it is less profitble

what happens to investment when the economy expands

more goods and services produced, so need for more capital so more investment

give the formula for accelerator theory

how doesc cost affect investment

if cost of raw material go up, then profitablity goes down

how does confidnece affect investment

if managers are confident and expect the economy to grow then they will invest more

if enough firms invest in capital goods, then there may be increase in output

how does the state of the world economy affect investment

if world econ is booming, then there will be more exports, so more investment

what is an exogenous shock

unexpected or unpredictable events that affects an econamy either positvely or negaitvelty and occurs outside the con modle

factors that affect investmetn CCIGARS

• C – Costs

• I – Interest rate

• G – Government regulation

• A – Accelerator theory

• R – Retained profit

• C – Confidence

• S – State of the world economy

facotrs affecting G

Trade cycle - eco growth fluctuates within different phases:

Recession - G ↑ to increase D ∴ reducing unemployment

Recession - G ↑ more spending on unemployment benefits

Booms - G ↓ to decrease AD and reduce inflation

what is a budget surplus

govermetn spending is less than goverment receipts

factors affecting imports and exports SNIPPE

Non price factors (like quality and innovation)

Prices (high prices of UK goods = less competitive).

Real Income (inc. M)

Exchange Rates (SP or WP?).

Protectionism (means less X).

State of world economy (if UK trade partners are doing well)