6.2 ~ Aggregate Demand

Tara Pugal
Flashcards by Tara Pugal, updated more than 1 year ago
Tara Pugal
Created by Tara Pugal almost 5 years ago


AS - Level Economics (Macroeconomics) Flashcards on 6.2 ~ Aggregate Demand, created by Tara Pugal on 04/23/2016.

Resource summary

Question Answer
What is consumer spending? spending by households on goods and services
What is the biggest component of AD? C
What are the main sources of consumer Y? wages savings investments pensions benefits
What is the marginal propensity to consume? (MPC) the rate at which consumers increase their consumption as Y increases
What is the marginal propensity to save? (MPS) the rate at which consumers increase their savings as Y increases
What does the MPC + MPS always equal? 1
Which group of people generally have a higher MPS? people on lower Y
What are factors that determine consumer spending? (6) real Y direct & indirect T ir household wealth consumer confidence distribution of Y
How do real Y determine C? if people's wages rise faster than prices, real Y will increase = higher level of real purchasing power
How does direct & indirect T determine C? if there is a cut in direct T, consumers will see ↑Y and spending power however if ↑T (indirect) = ↑P and ↓Y
How do ir determine C? ↓ir = cuts the cost of paying the debt on a mortgage and ↑the effective disposable Y of homeowners
How does household wealth determine C? e.g. a sustained ↓P of houses may = ↓personal wealth, ↓C as homeowners have less housing equity available to borrow (this is the negative wealth effect)
How does consumer confidence determine C? e.g. fears of ↑U and expectations of ↑T = ↓consumer confidence and encourages saving
How does the distribution of Y determine C? lower Y families tend to have ↑MPC therefore a redistribution of Y towards poorer families may boost total consumer D
What is the wealth effect? consumers tend to spend more when there is a market (in which share prices are rising) in widely-held assets like real estate or stocks, because rising asset prices make them feel wealthy
What are the two types of consumer borrowing? unsecured secured
What is unsecured borrowing? a loan/overdraft not tied to the value of another asset
Give an example of unsecured borrowing student overdraft bank loan
What is secured borrowing? lending where the borrower must use another asset as collateral for the loan
Give an example of secured borrowing a mortgage with a bank/building society
What is I? spending on K goods
What is I an effecting factor of? competitiveness in a globalising world
What is infrastructure? spending on new roads, wind farms, telecommunications etc by the private and public sectors
What is the relationship between AD and I? ↑I = positive multiplier effect (PME) = ↑AD
How does I create and destroy jobs? creates jobs in producing, designing etc destroys jobs to be replaced with machinery
What is the multiplier effect? when new injections of D for goods + services stimulate further rounds of spending = expansion of output, Y and profits
What is a positive multiplier effect? (PME) when an initial increase in an injection (or a decrease in a leakage) = a greater final ↑GDP
What is a negative multiplier effect? (NME) when an initial decrease in an injection (or increase in a leakage) = a greater final ↓GDP
What does the multiplier effect require? sufficient spare capacity for extra output to be produced
What is crowding out? where either ↑G or ↓T can = ↑gov borrowing and/or = ↑PL = ↑ir = ↓C/I = ↓AD = ↓GDP
When will the multiplier effect be greater? MPS extra Y on domestic goods + services is high consumer confidence is high firms have the capacity to expand production to meet increases in D
What happens when SRAS is highly elastic? the multiplier effect is likely to be high
What happens when SRAS in inelastic? the harder is it for SRAS to expand to meet rising AD
What is the accelerator effect? the relationship between planned I and the rate of change of national Y (GDP) (a surge in I by businesses when an economy is growing quite strongly
Give an example of the accelerator effect where a given change in D for consumer goods+services = a bigger % change in D for K goods
What is the negative accelerator effect? when the rate of growth of D in an industry slows, then net I fall
What is the economic importance of infrastructure I? (3) potentially high multiplier effects lack of infrastructure may discourage FDI ↑K stock/productive potential
What is the circular flow of income? the flows of goods + services and Y to factors of production
What are injections into the circular flow? I X G
What are withdrawals from the circular flow? savings T M
When is an economy in equilibrium? when the rate of injections = the rate of withdrawals
What does an ↑net injections do? ↑GDP, ↑Y
What does ↑net withdrawals do? ↓GDP, ↓Y
What happens when a gov is operating an ExFP and with a bigger budget deficit? G > T revenues (injections > leakages) = ↑GDP
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