| What is Aggregate Demand [AD] State the Formula of AD | -AD is the Total Demand, or Spending, in an Economy over a give Time Period
-AD is made up of all the Components that Contribute to the Economy, and is calculated as:
-AD= Consumption + Investment + Gov Spending + (Exports - Imports)
-AD = C + I + G + (X-M) |
| What is Consumption? [Referring to AD]
-What would rival Consumption? | -Consumptions [Consumer Expenditure] is the Overall Amount that households spend on Goods and Services. Doesn’t have Firms Expenditure factored in
-Savings would be the Opposite of Consumption, so thus it would usually be Inversely Proportional to Consumption |
| How Significant is Consumption in Britain’s AD? | -Britain has Consumption has 65% of its overall AD
-So changes in Consumption levels can lead to a Significant Impact on Britains AD |
| How can Disposable Income affect both Savings and Consumption? | -Disposable Income [Money after Income Tax and National Insurance] increasing leads to Consumption rising too.
-However, the Rate of Rising Incomes can lead to a Slower Rate of Rising Consumption, as Households may also Save more |
| How can Interest Rates affect both Savings and Consumption | -High Interest Rates will discourage Consumption, but instead, will Save to take advantage of the Higher Rates they get, and will not Borrow Money.
-Higher rates may also lead to less Disposable Income as People will pay more on Existing Loans and Mortgage
-The Opposite is true if Interest Rates Fall [C goes Up, Savings down —> More Loans taken out —> More Disposable Income as less spent on Loans and Mortgages] |
| How can Consumer Confidence affect both Savings and Consumption? [How can Confidence be affected ] | -Consumers feeling more confident about the Economy and own Financial place, gives them a more likely hood to Spend and not Save
-Confidence itself is affected through a different number of factors, eg a Recession is one, or Job Insecurity is another. Confidence is often seen as a Lag Time too - even after the Recession is done, Confidence may be low for some time |
| How can the Wealth Effect both Savings and Consumption? | -Being more Wealthier leads to more Consumer Spending as this links with Confidence. This is because they Feel Richer. The Opposite is true as well
-Keep in mind that if Non-Liquidity Assets are rising, like Real-Estate, it can create the risk of an Recession |
| How can Taxes affect both Savings and Consumption | -Direct Taxation will lead to a Fall in the Consumers Disposable Income, leading to spending Less, and Saving-more. The opposite may be True
-Indirect Taxation can also make Consumers spend less, as the Price will rise. Again, the opposite is True |
| How can Unemployment affect Savings and Consumption | -Unemployment rising usually will lead to less Spending and Saving more - even those with a Job as they fear that they would be made Redundant. [Consumer Confidence
-Falling Unemployment will mean more People have more Money, meaning more Spending. And Confidence goes up |
| What is the Difference with Savings and Investment? | -SAVINGS is usually made by Households, while INVESTMENTS are done by Firms |
| What exactly is Investment, as a Component of AD | -Investment is just the Money that Firms spend on Assets, which will make Goods or Services. Machinery, Computers and Offices |
| What is
1. Gross Investment
2. Net Investment
-Nike has 3 Old Machines, but then replaces them with 5 New Machines. What’s the Gross and Net? | 1. Gross Investment will be ALL Investment Spending
2. Net Investment will only have Investments that Increase the Productive Capacity.
-For Nike, the Gross would be 5 Machines, while the Net would be 2 Machines [difference of 5 and 3] |
| What % Does Investment make of the UK AD? | 15% |
| Why can Risk affect Investment? | -Risk itself will vary with the Investment Amount itself
-If a High Risk is present for a Firm, then the Firm will be Reluctant to go ahead. Economic Instability is one example |
| Why can Government Incentives and Regulation affect Investment? | -Subsides, or Reduce Indirect Taxation, can encourage more Investment as they’ll have more Funds to use
-More Rules can lead to more Costs for the Firm, reducing the Profits that can be used for Investment |
| How can Interest Rate and Credit Availability affect Investment | -Firms will Borrow to Invest usually. So therefore the Interest Rates will influence if the Firm will Take out a Loan or not. [High Interest Rates = No]
-Higher Interest Rates will also incur a Greater Opportunity Cost on Existing Loans - you’ll have to Pay More.
-And obviously the Availability of Credit will affect it - No Credit [Loans] means little Investment |
| How can Technical Advances affect Investment | -Firms will want to Invest in the Newest and Productive Technology to stay on top. |
| How can Business Confidence, and ‘Animal Spirts’ [Define] affect Investment | -If a Firm is Confident it will get Profits, then it will Invest
-Business Confidence is dependent of the Company’s Mangers, as Keynes pointed out that not All Investment is done on Rational Thinking, but that Emotions and Gut Feeligns are also involved - These are your Animal Spirts |
| What is Government Spending? | -Government Spending is just the Money Spent by the Government on Public Goods and Services, like Defence, Health and Education.
-Money that only Directly Affects the Output of the Economy is Included - NOT Benefits and Transfers of Money
-Government Spending is a Large Component of AD, so it can therefore Influence it fairly |
| What is a Government Budget?
-How is the UK’s Budget? | -Government Budget will showcase the Governments Spending, and Revenue. This can be a Deficit [More Spending than Revenue] or Surplus [More Revenue than Spending]
-For the UK, it has been a Budget Deficit for a long time [Not in Services but in Goods] |
| How can Government Spending [Fiscal Policy] influence AD? | -If AD is Low, and Economic Growth isn’t High as well, then Government will Overspend to Increase AD and have Economic Growth
-If AD is High, and the Economy is Booming, then the Government will impose Higher Taxes and Spend Less to Reduce AD and slow down the Economic Growth |
| How can the Budget Status affect the Circular Flow of Income | -If there is a Budget Surplus, then more Money is Withdrawing overall from the Flow, but a Budget Deficit will be an overall Injection.
-This is because Surplus means the Taxes are Greater than Spending, and Deficit is the Opposite |
| Why may choosing to run a Long Term Budget Imbalance harm the Economy? | -Long Term Surplus can mean the Economic Growth is not at its Potential as Governments aren’t Spending or Taxing too High
-Long Term Deficit will lead to a High National Debt |
| What are Exports and Imports? | -Exports are Goods that are Made in one Nation, and then sold Abroad
-Imports are Goods that are brought Into a Nation after being produced Abroad |
| How can the Exchange Rate affect Exports and Imports? | -Long Run will see Imports more Cheaper and Exports more Expensive if the Value of Currency Rises. This makes Demand for Imports Up, and Exports down. Stronger Currency therefore will Favour Imports [Opposite is True]
-Short Run will see that Imports and Exports Demand are Price Inelastic. Some goods won’t have Substitutes while others will, but there’s Time Lag before Nations Switch. So a Stronger Currency [Short Term] will Improve Net Exports [As its worth More] [Because they can’t switch on time] |
| How can the State of the World Economy affect Imports and Exports? Use Britain and Ireland as example s | -Higher a Nation Real Income, then they will Import More. So Net Exports will Fall as a result
-Ireland is experiencing Negative Economic Growth, and Britain is its main Exporter. Britain will see [If Imports stay the Same] a Worse Net Exports as Ireland starts Importing Less. The Opposite [Ireland has Economic Growth] is True [Britain is better off] |
| How can Protectionism affect Imports and Exports | -Short Run will see Tariffs and Quotas [Reduces Imports] increase Net Exports as Imports fall
-But in the Long Run, Firms that are Protected from International Competition will be Less Efficient as there’s less Competitors
-Other Nations may also want to have Tariffs and Quotas. |
| How can Non-Price Factors [Quality] affect Imports and Exports? | -If Germany can make more Technological Advanced Cars that is more Higher Quality, then it will Increase Exports as people abroad will Demand for such if its that good |
