explain the impact of an increase in income on AD ?
AD is the total D in an economy show by the formula ... If incomes rise, workers can spend more increasing C, makes up 60% so AD will signif increase. If C increases - more sales profit - increase I - 14% of AD - increase AD - Gov receive more tax rev so
1 of 19
explain the impact of an increase in IR on consumers and firs
increase the reward / return for savings which encourages more saving - less C. Increases cost of borrowing so increase amount to pay back on mortgages n borrowing - lower disposable - less C also discourages firms to invest as c4b increases
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explain the impact of a reduction in IR on consumers and firms
reward 4 saving falls so less saving, MPC increases n C rises (60%) - AD rises. Cost of borrowing is less so consumers more likely to buy a house bc lower mortgage. Bc of increased C - sales n profits increase n c4b is low so firms encouraged to I more
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how does a low IR affect AD compared to how a high IR affects AD
low interest rates = higher ad - investment increases, C increases, AD shifts right
high interest rates = lower ad
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how does a country's saving ratio affect its AD ?
high saving ratio - consumers save a large % of what they earn - less C, less AD
low savings ratio - saving a small % of what they earn - spend more, higher C, more AD
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what effect on wealth will a reduction in house prices lead to ?
a reduction in house prices will lead to a negative wealth effect and so consumption will fall - ad will decrease and shift left
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what is the formula needed to find the multiplier ratio ?
total change in real Gdp / initial injection
7 of 19
calculate the multiplier ratio if the GOV spends £92 billion on infrastructure projects which increase in the economy's real gdp by £146 billion
total change in real gdp / initial injection
146 / 92 = 1.58695
= 1.59 billion
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explain the impact of an increase of imports on AD
imports are a neg component of AD so will directly reduce AD, they reduce domestic spending bc ppl spend on foreign g&s instead, domestic firms earn less profit - reduces I and unemployment rises - less consumption (circular flow) - reduce G as receive le
9 of 19
who earns and pays interest
savers earn interest on their savings whereas borrowers pay interest
10 of 19
explain why national income = national expenditure which = national output
the total spending from households across economy must come from total income they earn, households spend on the total output of g&s produced by firms in the economy
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what happens to money when we export goods and services from abroad
money comes into the circular flow of income from foreign consumers - increase expenditure revenue
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what does it mean if the circular flow of income is in equilibrium ?
total injections must equal total withdrawals
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what are the three injections into the circular flow of income ?
GIX
government spending
investment
exports
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what are the three leakages / withdrawals from the circular flow of income ?
STI
savings
taxations
imports
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using the circular flow of income how can you calculate the change in real GDP ?
the difference between total injections and total withdrawals, if more money is coming into the economy then leaving real gdp will increase
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why does the quantity supplied increase as price increases ?
as prices increase, firms can make more profit by selling their goods at these higher prices. therefore they increase the quantity that they sell in order to profit maximise
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what is the definition for the short run in economics ?
where at least one factor of production is fixed
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why does the sras curve slope upwards ?
increased output increases costs in the short run - they dont have time to hire new workers so have to pay current workers overtime pay which increases costs and so price level increases
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Other cards in this set
Card 2
Front
explain the impact of an increase in IR on consumers and firs
Back
increase the reward / return for savings which encourages more saving - less C. Increases cost of borrowing so increase amount to pay back on mortgages n borrowing - lower disposable - less C also discourages firms to invest as c4b increases
Card 3
Front
explain the impact of a reduction in IR on consumers and firms
Back
Card 4
Front
how does a low IR affect AD compared to how a high IR affects AD
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