Aggregate demand/supply:

What is the multiplier effect?

When an e=injection is made into the circular flow, the actual change in the national incomeis greater than the initial injection, also leads to a larger increase in AD

How is the multiplier calculated?

1/1-mpc

How is wealth different to income?

Wealth is the total value of all the assets owned by an individuals/firms, wealth is a stock concept whereas income is a flow on money

What are the components of AD?

Consumption (60%-65% of AD)+Investment (15% of AD)+Government spending+(exports-imports)

What are some of the main factors that influence consumption and saving?

• Income

• Interest rates

• Consumer confidence

• Wealth effects

• Taxes

• Unemployment

What factors impact levels of investment?

• Risk

• Government incentives and regulation

• Interest rates and access to credit

• Technical advances

• Business confidence

What does government spending not include?

Does not include transfers of money eg benefits. Government spending is the money spent on public goods/services

What factors affect imports and exports?

• The exchange rate (WPIDEC) (SPICED)

• Changes in the state of the world economy

• Degree of protectionism

• Non-price factors eg quality

What causes movement along the AD curve?

Change in price

What causes the AD curve to shift?

• Changes in fiscal policy

• Exchange rate/protectionism

• Interest rates

How do you calculate MPC and MPS?

Change in consumption/change in income

Change in savings/change in income

How do you calculate APC and APS?

consumption/total income

amount saved/total income

How do you calculate MPW?

How do you calculate the multiplier with MPW?

MPW=MPS+MPTax+MPImport

1/MPW

What causes a move along SRAS?

Change in price

What causes a shift of SRAS?

Changes in the costs of production

What causes a shift in LRAS?

Change in quality/quantity of factors of production

What are some examples of changes in factors of production?

• Increase/improvement of education/skills

• demographic changes (more skilled migrants)

• Supply of new resources

• More/improved healthcare

• Increased factor mobility

• Better banking for easier borrowing for investment

What is the accelerator effect?

Accelerated increase in investment, if national income grows rapidly, businesses will invest heavily expecting to increase output and make profit in the future

Where does macroeconomic equilibrium occur?

AS=AD

What is the impact of an increase in AD?

Less unemployment, more inflation, more economic growth

What is the impact of an increase in SRAS?

More economic growth, less unemployment and inflation, improved balance of payments

What is the impact of an increase in LRAS?

More economic growth, less inflation, remain at full employment, improved balance of payments.