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Description
Flashcards by Tara Pugal, updated more than 1 year ago
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Created by Tara Pugal
about 8 years ago
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| Question | Answer |
| What is the formula for AD | AD = C + I + G (X-M) |
| What does C stand for? | consumption |
| What does C include? | D for durables + non-durables |
| What does I stand for? | capital investment |
| What does I include? | spending by firms and government on capital goods |
| What does G stand for? | government spending |
| What does G include? | spending on state provided goods + services |
| What does (X-M) stand for? | net exports |
| What does (X-M) include? | X sold overseas (injection) - M (withdrawal) |
| What does it mean if (X-M) is positive? | there is a trade surplus (adding to AD) |
| What does it mean if (X-M) is negative? | there is a trade deficit (reducing AD) |
| What are shocks to AD? | unexpected events that cause changes in the level of D, output + U |
| What are some shocks to AD? | change in ER recession in trading partners slump in housing P an event like the credit crunch unexpected change in D side policies |
| What is the relationship between AD and the PL? | they have an inverse relationship (↑PL = contraction in AD) |
| What are three examples of the relationship between AD and PL? | falling real incomes balance of trade ir effect |
| Explain falling real Y in terms of AD and PL? | ↑PL = ↓Y = ↓C = ↓AD |
| Explain the balance of trade in terms of AD and PL? | a persistent ↑PL in country A = cheaper foreign M = ↓X and ↑M = ↓(X-M) = ↓AD |
| Explain the ir effect in terms of AD and PL? | if ↑PL = inflation = ↑D for money = ↑ir with a deflationary effect on the economy |
| What are factors that cause a shift in AD? (6) | changes in expectations changes in MP changes in FP global economic events changes in household wealth changes in the S of credit |
| How do changing expectations shift AD? | when ↓confidence = ↑saving therefore less I because of weak D + lower expected profits |
| How do changes in MP shift AD? | if ↓ir = ↓cost of borrowing + incentive to save = ↑C = ↑I = ↑AD there are time lags!! |
| How do changes in FP shift AD? | ↑G = ↑I = ↑AD ↓T on Y = ↑Y = ↑ C = ↑ AD |
| How do global economic events shift AD? | ↓value of a currency = ↓P of X and M = ↑AD ↑Y overseas = ↑D for UK X = ↑(X-M) = ↓AD |
| How do changes in household wealth shift AD? | changing share and property prices affect the level of wealth, declining asset prices can hit confidence |
| How do changes in the S of credit shift AD? | the availability of credit from the banking system is vital for the smooth functioning of most modern economies |
| What causes a shift outwards of the AD curve? (4) | ↓X ↓G ↑ir ↓household wealth |
| What causes a shift inwards of the AD curve? (5) | ↓ER ↓T ↑house prices expansion in S of credit ↓ir |
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