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Flashcards on Aggregate Demand, its components, and influences based on Edexcel Economics A-level Theme 2 notes.
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What is Aggregate Demand (AD)?
The total demand in the economy, measuring spending on goods and services by consumers, firms, the government, and overseas consumers and firms. It is the sum of C+I+G+(X-M).
What are the components of Aggregate Demand?
Consumer Spending (C), Investment (I), Government Spending (G), and Net Exports (X-M).
Which component of AD is the largest and most significant to economic growth?
Consumer spending (C).
What does Investment (I) refer to in the context of AD?
Business spending on capital goods.
What portion of GDP does government spending account for?
18-20%
Why are transfer payments not included in Government Spending when calculating AD?
Because no output is derived from them; it's simply a transfer of money.
What does a positive value of (X-M) indicate?
A surplus in the current account on the balance of payments.
What causes a movement along the AD curve?
Changes in the price level.
Explain why the AD curve slopes downward.
Higher prices reduce real incomes, foreign goods become relatively cheaper, and high inflation leads to higher interest rates.
What factors shift the AD curve?
Changes in the components of AD (C, I, G, or X-M).
What is disposable income?
The amount of income consumers have left over after taxes and social security charges have been removed.
Define Marginal Propensity to Consume.
How much a consumer changes their spending following a change in income.
In relation to marginal propensity to save, who is more likely to spend more?
Consumers on low incomes.
What is the relationship between consumer's marginal propensity to save and consume?
A consumer’s marginal propensity to consume added to the marginal propensity to save is equal to 1.
How do lower interest rates influence consumer spending?
It is cheaper to borrow and it reduces the incentive to save, so spending increases. It also lowers the cost of debt.
How does consumer confidence affect spending?
Higher confidence means consumers spend more, as they are less concerned about saving.
What is the wealth effect?
A rise in the price of assets, like houses, makes people feel wealthier, so they spend more.
Define housing equity.
The difference between the market value of a property and how much loan is remaining to be paid
What is gross investment?
The amount that a firm invests in business assets that does not account for depreciations.
What is net investment?
The actual addition to the capital stock of an economy, after depreciations have been considered. (Net investment= gross investment – depreciation)
How does high economic growth influence investment?
Firms make more revenue, offering more profits available to invest.
How do interest rates affect investment decisions?
Investment increases as interest rates fall, since the cost of borrowing is less.
How does limited access to credit affect investment?
Firms find it harder to gain access to credit, so it is either more expensive or not possible to gain the funds for investment.
How do government regulations influence investment?
Lower taxes and government subsidies encourage investment, wheras, high levels of regulation discourage investment
What is the trade cycle?
Another term for the business cycle, which refers to the stage of economic growth that the economy is in.
How might governments respond to recessions regarding spending?
Increase spending to stimulate the economy, which increases the government deficit.
What is fiscal policy?
How governments use changing government spending and taxation to influence the economy.
What are automatic stabilizers?
Policies which offset fluctuations in the economy, such as transfer payments and taxes. They are triggered without government intervention.
What is expansionary fiscal policy?
Increasing spending on transfer payments or on boosting AD, or by reducing taxes.
What is contractionary fiscal policy?
Decreasing expenditure on purchases and transfer payments. Additionally, tax rates might increase.
How does real income influence net trade?
During periods of economic growth, consumers have higher incomes and they can afford to consume more, so the are likely to import more.
How do exchange rates influence net trade?
A depreciation of the pound means imports are more expensive and exports are cheaper, so the current account trade deficit narrows.
What is protectionism?
The act of guarding a country’s industries from foreign competition. It can take the form of tariffs, quotas, regulation or embargoes.
How do non-price factors influence net trade?
The competitiveness of a country’s goods and services, which is influenced by supply-side policies, impacts how many exports the country has.