Complete AS marco economic revision notes

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Macro economics notes
Aggregate demand: is the total demand for a country's goods and services at a given price
level in a given time period.
AD= C+I+G+(XM)
Components of AD
Consumer expenditure (consumption) is one of the largest components of AD, it is
the spending of a household, on items such as food, clothing and insurance. There
are a range of influences that change consumer expenditure, real disposable
incomes this is the main influence richer households and economies tend to spend
more than poorer ones. APC means average propensity to consume, this is the
portion of income spent. Someone on a higher income of £7000 disposable income
will spend more then someone who's is £600. however it will be a lower portion of
their disposable income because they can still spend less of a portion and still have a
higher standard of living and than the person earning £700 and then save the rest. So
the they may spend £4500 and the other £630 the other would have a higher APC
£630/£700 = 0.90 when £7000 would get £4500/£7000= 0.0.75 wealth
the more wealth people have in terms of savings and homes they tend to spend
more. Wealth can be used to borrow against such as mortgages. Consumer
confidences and expectations this can have significant influence on consumer
spending, when they feel optimistic about the future ie in their job and expecting
wages to be higher they will spend more the rate of interest if the
rate of interest is low then people are less likely to save because they wont gain as
much interest also it should be cheaper to borrow so they will borrow more.
The age structure of the population it is generally thought that younger and the
elderly spend a relatively high proportion of their disposable income(not always the
case) distribution of
incomes government measure that re distribute income from the rich to the poor will
mean they will spend more as poor are more likely to spend I higher portion of
disposable income inflation if people expect prices
to rise rapidly in the future they may increase spending now. However there have
been times when people have increased their savings rather than spending
Investment is the most vital part of a component of AD on things such as spending
on capital goods, such as vehicles, office blocks ect. Changes in
disposable income, if this increases demand is likely to increase for goods and
services so firms are more likely to invest to expand the capacity
capacity utilisation if firms are operating at full capacity they are more likely to
expan, if they have spare then they can still increase output without investin
corporation tax a cut in tax would mean they could keep more profit so they would
then have more money to invest
Government spending is spending by centrally planned governments and local
governments, governments view on market failure in countries where there is
higher state intervention government spending takes up a higher portion of AD.
Unemployment if there is high levels then the government may be more incline to
intervene to help one of the economic issues desire to please electorate, they may
have people pleasing policies to gain vote and stay in power

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Net exports add foreigners spending on the country's goods and services deducted
by the populations imports.…read more

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The multiplier effect ­ when injection exceeds leakages aggregate demand will increase.
The process by which any change in a component of AD results in a greater final change in
real GDP.
When injections exceed leakages ad will increase the rise in ad will have a greater final effect
on the economy,
The effect occurs when people spend money that expenditure becomes the income of those
who sell the products.…read more

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Causes of economic growth
Short run ­ an economy can experience with spare capacity as a result in an
increase in AD, eg fall in exchange rates could increase net exports, consumption
lead growth, a cut in income or a decrease in interest rates or government
Net invest ­ this is good because it can benefit AD and AS, meaning it is increasing
its productive capacity, which can lead to long run growth can also be caused by an
increase in the labour force.…read more

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There is also the claimant count which measure unemployment biased on how many
people are claiming on job seekers allowance, and is a monthly count and people
sighed up to the job centre who are not claiming
Difficulties in measuring unemployment
the LFS is thought to capture the overall view of the unemployed, it also provided a
larger range of information of the labour force however it is expensive to collect this
information, and risks of sampling errors
the claimant count is quick and cheap…read more

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Can reduce demand pull and cost push inflation.…read more

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There are two different types of inflation demand pull and cost push
Demand pull ­ arises when AD increases at a faster rate then AS especially if the firm is
producing at near full capacity then it is likely a rise in demand will increase prices.
Cost push inflation ­this is when the costs of productions increase for firms so they have
to rise their prices to cover their costs and keep there profit margins.…read more

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Deflation it is possible for a country to consider deflation, stats tend to overstate inflation,
so may mask deflation. From a supplyside this may be a positive as it may mean a cut in the
price of raw materials.
Or it may be caused by a fall in AD which can lead to a deflationary spiral.…read more

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A country to have a high inflation rate and low productivity is also likely to have a deficit, but
this may continue if their economic performance doesn't change.
Exchange rates
The determination of exchange rates an exchange rate is the price of one currency in terms
of another,the trade weighted index measures the pounds exchange rate against a basket of
currencies giving each country a weight in goods and services.…read more

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The key aim is to influence AD either by increasing to increase spending decrease tax
Fiscal policy the taxation and spending of a government
It can be reflationary(increasing AD) or deflationary (decreasing AD)
Changes in tax may be used for other reasons such as trying to increase the consumption of
demerit goods, altering the distribution of income simplifying the system and altering
incentives.…read more


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