CHAIN OF ANALYSIS

How does a rise in disposable income affect AD?

Disposable income rises → consumption rises → AD shifts right → real GDP rises → employment rises → inflationary pressure increases.

How does a fall in disposable income affect AD?

Disposable income falls → consumption falls → AD shifts left → real GDP falls → unemployment rises.

How do rising house prices affect AD?

House prices rise → positive wealth effect → consumer confidence rises → consumption rises → AD shifts right → GDP rises.

How do falling house prices affect AD?

House prices fall → negative wealth effect → consumption falls → AD shifts left → growth slows.

How does an increase in consumer confidence affect the economy?

Consumer confidence rises → consumption increases → AD rises → output and employment increase.

How does a fall in consumer confidence affect the economy?

Consumer confidence falls → consumption falls → AD falls → economic growth slows.

How does business confidence affect investment?

Business confidence rises → investment increases → AD rises → multiplier effect occurs → GDP rises.

How does a fall in business confidence affect investment?

Expected profits fall → investment falls → AD decreases → economic growth slows.

How do exports increase economic growth?

Exports rise → AD increases → output rises → employment rises → incomes rise → multiplier effect occurs.

How do imports affect AD?

Imports rise → net exports fall → AD decreases → GDP growth slows.

How do lower interest rates increase AD?

Interest rates fall → borrowing cheaper → consumption and investment increase → AD shifts right.

How do higher interest rates reduce inflation?

Interest rates rise → borrowing more expensive → consumption and investment fall → AD shifts left → demand-pull inflation falls.

How does quantitative easing increase AD?

Money supply increases → banks lend more → borrowing rises → consumption and investment rise → AD increases.

How does a depreciation increase growth?

Exchange rate falls → exports cheaper → export demand rises → AD increases → growth rises.

How does an appreciation reduce growth?

Exchange rate rises → exports become more expensive → export demand falls → AD decreases.

How does fiscal stimulus increase growth?

Government spending rises and/or taxes fall → AD rises → output and employment rise.

How does contractionary fiscal policy reduce inflation?

Government spending falls and/or taxes rise → AD falls → inflationary pressure falls.

How does supply-side policy increase growth?

Productivity rises → LRAS shifts right → productive capacity increases → sustainable growth rises.

How does education and training increase growth?

Human capital improves → labour productivity rises → LRAS shifts right → potential output increases.

How does improved infrastructure increase growth?

Business costs fall → productivity rises → LRAS shifts right.

How does higher productivity affect the economy?

Output per worker rises → costs fall → SRAS shifts right → output rises → inflation falls.

How does demand-pull inflation occur?

AD rises faster than productive capacity → price level rises → inflation increases.

How does cost-push inflation occur?

Production costs rise → SRAS shifts left → output falls → price level rises.

How do higher energy prices create inflation?

Production costs increase → SRAS shifts left → inflation rises → growth slows.

How does unemployment reduce growth?

Household incomes fall → consumption falls → AD decreases → GDP growth slows.

How does economic growth reduce unemployment?

Output expands → firms demand more labour → employment rises → unemployment falls.

How does the multiplier work?

Injection enters economy → income rises → spending rises → further income created → final increase in GDP exceeds initial injection.

How does a rise in MPC affect the multiplier?

More additional income is spent → larger multiplier effect → larger increase in GDP.

How does a rise in withdrawals affect the multiplier?

Savings/taxes/imports rise → money leaves circular flow → multiplier becomes smaller.

How does a current account deficit affect AD?

Imports exceed exports → net exports negative → AD lower → growth may slow.

How does strong global growth affect the UK?

Global incomes rise → UK exports rise → AD increases → GDP grows.

How does a negative output gap affect inflation?

Spare capacity exists → little upward pressure on prices → inflation remains low.

How does a positive output gap affect inflation?

Economy operates above capacity → labour shortages emerge → inflationary pressure increases.