Economics AS Unit 2 revision

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Aggregate demand: the total demand for a country's goods and services at a given price
level in a given time period.
AD=C+ I +G + (X-M)
Price value: the average of each of the prices of all products produced in an economy.
Consumer expenditure: spending by households on consumer products.
Investment: Spending on capital goods.
Government spending: spending by the central government and local government on goods
and services.
Exports: Products sold abroad.
Imports: Products from abroad.
Net exports: the value of exports minus the value of imports.
Consumer expenditure (also known as consumption) in most countries is the largest
component of aggregate demand. Spending by households on items (e.g. clothing,
food and insurance).
Investments are the most volatile components of AD. Spending's on capital goods
may rise one year and fall the other.
Government spending (e.g. health care and police services). It doesn't include
TRANSFER PAYMENTS (such as housing benefits, job seekers allowance and state
If government would increase jobseekers allowance, then more would be spent in
terms of consumer expenditure.
Net exports can provide a positive or negative contribution to a country's economy.
If a country has a trade surplus, there will be an increase in aggregate demand. A
trade deficit though, would lower aggregate demand.
Transfer payments: money transferred from one person or group to another not in return
for any goods or services.
Jobseekers Allowance: a benefit paid by the government to those unemployed and trying to
find a job.
Trade surplus: the value of exports exceeding the value of imports
Trade deficit: the value of imports exceeding the value of exports.

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Real Disposable Income: Main influence on consumer expenditure. Richer households
and richer economies tend to spend more than poorer ones. Yet proportion of
income to spend (APC) may fall as real disposable incomes rise. (e.g. a banker may
continue his normal spending's, even if his wage rises.)
Wealth: The more wealth that people have (in form of: their home, savings accounts
and shares) the more they tend to spend. Wealth can lead to greater consumer
confidence.…read more

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Saving Schemes: When people agree to save a certain amount on a regular basis in ie
Saving schemes: When people agree to save a certain amount regularly in insurance
schemes or pensions.
Range of financial institutions: A country with a high number of established and
trusted financial institutions, people find it straightforward to save and will have
confidence. Yet if a financial system becomes more developed, it becomes more
developed and people find it easier to borrow.…read more

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A higher interest rate may make it more expensive to borrow which may
discourage some investment projects.
3.) A change in the rate of interest may affect the expected return on
investments. (Higher interest rates are likely to reduce investments, as firms may
assume that consumer expenditure will fall)
4.) A rise in rate of investment tends to reduce demand for shares. As those
people who may have bought shares may decide to put their money into high
interest receiving bank accounts).…read more

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Real disposable incomes at home: A rise in income at home may result in a fall in
exports. As firms may divert more products to the home market to meet domestic
The domestic price level: The value of exports may fall and the value of imports may
rise if the domestic price levels rise relative to the price levels in the country's trading
partners.…read more

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AD curve is downward sloping because:
THE WEALTH EFFECT: The change in a household/firms real wealth when the price
levels change. A fall in the price level increases the amount of goods and services
that wealth kept in financial institutions can buy.
A rise in price level changes the purchasing power of wealth, causing aggregate
demand to contract.…read more

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A decrease in AD may be due to a fall in share prices on the global market. Possibly because
wealth would decline which would be likely to reduce consumption, and if firms find it
difficult to raise finance, investment may decline.
Aggregate supply: the total amount that producers in an economy are willing and able to
supply at a given price level in a given period of time.…read more

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A change in AS= the total output that producers are willing to supply will alter.
A decrease in AS shown by the AS curve shifting left.
An increase in in AS is shown by a shift to the right
Main cause for the change in AS in the short run are changes in costs of production.…read more

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Quality may be improved by management training and improved education.
Variety of ways in which quality of land can be improved. Productivity of farmland may
be improved through the usage of fertilisers.
Macroeconomic Equilibrium: a situation where aggregate demand equals aggregate supply
and real GDP is not changing.
If AD was higher than AS there would be a shortage of goods and services. Excess AD
would incentive firms to expand their output.…read more

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The multiplier effect: the process by which any change in a component of aggregate demand
results in a greater final change in real GDP.
When injections exceed leakages, AD will increase. Rise in AD will have a greater final
effect on the economy.
Multiplier effect occurs when people spend money that expenditure becomes
another's income. They in turn, will spend some of the money that they receive. So
there's a knock on effect. And AD rises more than the initial amount.…read more


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