AS Economics Paper 2

AS Economics Paper 2 What are the determinants of AD. Which is the most significant in boosting UK economics growth? - answer-AD = C + I + G + (X-M) Consumer Spending + Capital Investment + Government Spending + (Exports - Imports) Consumer Spending is the most important. Define the marginal propensity to consume. - answer-This measures the proportion of extra income that is spent on consumption. The change in consumption divided by the change in income. What factors determine the Marginal prospensity to consumer? - answer-Income levels - at low income an increase is likely to see a high MPC. Temporary/permenant - may be more inclined to save if only a bonus rather than a raise Interest rates - higher interest rates encourage saving rather than consumption.. Consumer confidence - high confidence will encourage people to spend. Low MPC if pessimistic. How does MPC and the multiplier effect relate? - answer-The size of the MPC determines the magnitude of the multiplier effect. What are the determinants of investment? - answer-- expected return on investment - rate of interest - business confidence - change in national income Define absolute poverty. - answer-When a household does not have sufficient income to sustain even a basic acceptable standard of living. Define relative poverty. - answer-A level of household income that is considerable lower than the median level of income within a country What is the accelerator effect? - answer-When an increase in national income results in a proportionately larger rise in capital investment spending. How does the accelerator effect happen? - answer-- Firms will respond to growing demand by expanding production and making fuller use of their existing productive capacity - they may feel that the higher level of demand will be sustained and choose to increase spending on capital goods - therefore the demand for capital goods is being driven by the demand for the products the the firm is supplying to the market What is the negative accelerator effect? - answer-When the rate of growth in an industry slows so investment spending by businesses often falls What are some macroeconomic advantages of a higher level of investment? - answer-- new capital can boost productivity and creates additional capacity to supply - creates extra demand in investment goods industries and can lead to strong multiplier effects on the level of GDP Investment will boost a country's competitiveness and therefore improve the trade balance When will the accelerator effect be strongest? - answer-- when the rate of change of consumer income and spending is strongly positive - when the amount of spare productive capacity for businesses is low - when the available supply of investment funds is high What events can cause a change to aggregate demand? - answer-- a large rise or fall in the exchange rate - a recession in main trading partners - a slump in the housing market or a big change in share prices - an unexpected cut or rise in the interest rates Explain why AD and the price level have an inverse relationship. - answer-Falling real incomes - as price level rises, the real value of people's income fall and consumers are less able to buy the items they want or need The balance of trade - a persistent rise in the price level of a country could make foreign-produced goods and services cheaper Interest rate effect - if the price level rises, inflation and an increase in the demand for money will be caused