Aggregate Demand

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  • Created by: Nicole
  • Created on: 26-01-13 17:29
What is GDP?
Total value of goods and services produced by economy in a time period
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Calculating GDP?
G + I + C + (X-M)
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Calculating real GDP if inflation is 3%. 2007 sees a £4,000 GDP while 2008 sees a £4,500 GDP.
Calculation is 4500 x 100/103
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What are the three injection?
Export, Government Spending and Investment.
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What are the three leakages?
Imports, Taxes and Savings.
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Firms to households?
Wages, salaries, interest and rent.
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Households to firms.
Spending on goods and services.
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What is Aggregate Demand?
Total demand for domestic output at a given price level in a given time period.
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What is domestic?
Means within a country
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What is Consumption?
Domestic household spending on products.
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Importance of consumption?
Account for 64% of AD
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Influences on consumption.
Real disposable income. Distribution of income. Interest rates. Wealth. Availability of credit. Consumer confidence. Technological advances.
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What is average propensity to consume.
Proportion of household income spent on products.
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What happens to APC when income rises?
Falls as households can afford to save.
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Mortgage equity withdrawal.
Households borrow against value of house so if house prices rise so will consumption.
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What is investment?
Spending by domestic firms on capital goods.
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Why do firms invest?
Firms invest if expected return is greater than cost of capital goods.
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Why hold stock?
Enable production and meeting unexpected orders.
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What is capacity?
Maximum amount of output firm can produce with current resources in a given time period.
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Capacity utilisation.
The extent to which firm is using its resources.
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Spare capacity.
The ability to increase output with existing resources.
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Capacity utilisation and investment.
Firms more likely to invest in new capital if near to full capacity.
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Main influences on investment
Disposable income. Capacity utilisation. Business expectation. Order books. Availability of credit. Interest rates. Economic stability. Risk. Corporation tax. Cost of capital. Technological advances.
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What is governent?
A body that passes and enforces laws, collects taxes to finance public expenditure and intervenes in markets to influence behaviours of economics agents.
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What is Governement spending?
Spending by central or local Government?
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Current spending?
Running public services.
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Capital expenditure
On pubic infrastructure.
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Transfer payment?
Taxpayers to benefit receivers.
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Debt interest payments?
To holders of government debt.
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Factors influence on public spending?
Political priorities. Economic cycle. Demographics. Size of national debt. Tax revenues. Technological advances.
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Explain transfer payments?
Earned income is transferred to unemployment or child benefits who don't correspond output.
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Budget?
An annual report setting out government tax plans.
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Net government spending?
Difference between public expenditure and tax receipts.
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What is budget deficit?
Amount of government spending exceeding government income over a period of time.
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Cyclical deficit?
Caused by downturn and recession stages. Taxes fall while unemployment benefits rise.
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Tackling cyclical deficits?
Disappear when boom and taxes rise while cuts to benefits occur.
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Structural deficits?
When government receipts too low to sustain public spending.
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Tackling structural deficit?
Reduce government spending and rise taxes.
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What is Budget position?
Relationship between government spending and tax revenues.
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Balanced budget?
G = T
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Budget surplus
T > G
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Budget deficit
G > T
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Biggest deficit financed ?
Deficit is funded by borrowing and adding to nation debt when government spend more than tax revenues.
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National debt
Total amount owned by the government.
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When it arises and size?
When government is running at constant deficit and if the previous ones are large affects how large national debt is.
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Cost of national debt?
Interest rates which means opportunity cost on infrastructure.
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Problem with national debt?
If it becomes too large then burden of interest payments has severe impacts on level of public services.
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Definition of price level?
Price level is a certain average of the prices of a broadly defined group of commodities
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How is price level measured?
Price level is computed by statistical offices according to conventions. Different industries will decide their prices.
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What is real GDP?
The output of goods and services from a economy in a year after inflation has been taken into account.
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How is slope caused by wealth affect?
As price level decreases the wealth increases.
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How is slope caused by interest rate affect?
As price level decreases interest rate decreases.
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How is slope caused by international trade affect?
Price level fall domestically more exports as cheaper to others.
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What causes a movement in aggregate demand?
Change in price level.
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What causes a shift in aggregate demand?
-Consumption -Investment -Government spending -Net export
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Economic cycle?
Boom, slowdown, recession and recovery.
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Card 2

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Calculating GDP?

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G + I + C + (X-M)

Card 3

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Calculating real GDP if inflation is 3%. 2007 sees a £4,000 GDP while 2008 sees a £4,500 GDP.

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Preview of the front of card 3

Card 4

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What are the three injection?

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Card 5

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What are the three leakages?

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