Notesale: Turn your study into money

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2
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● AD = Consumption + Investment + government spending (G - T) + trade
(X-M)
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● There’s a movement along the AD curve when the price level changes
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● There are three reasons why the AD curve is downwards sloping =
savings (if saving increases, then consumption and investment decrease), low
price level (net exports and consumption increase) and total spending (always
roughly the same because people have the same amount of money to spend)
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This is called the real balance effect
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g
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(Disposable income = income remaining after the deduction of taxes, which is
available to be spent or saved as one wishes)
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Big impact on mortgages
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● Consumer confidence (e
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low unemployment and good job prospects
leads to a shift in AD)
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● Wealth effects (stock) - (increase in assets leads to people feeling wealthier,
so they are likely to spend more of their disposable income… even if their
money is tied up/inaccessible in shares
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2
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3 Investment (15% of AD)
● Investment = spending on capital goods (e
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machinery)
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● Business expectations and confidence (expectation for profit and expected
demand in the economy
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● Corporation tax (level of retained profits will increase if corporation tax
decreases)
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● Level of competition (more competition = more investment)
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● The influence of government regulations
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● Demand for exports
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*Animal spirits = the mixture of confidence, trust, mood and expectations which
businesses and consumers have
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Accelerator effect = if the rate of real GDP in an economy is increasing, this leads
to increased investment which will increase real GDP, etc…
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2
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● Capital spending = government spending on infrastructure projects
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● Trade cycle = the pattern of economic growth which changes from booms to
recessions or slow growth in a fairly regular pattern
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● Budget surplus = taxes are greater than spending in a fiscal year
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Influences on government expenditure include:

● Trade cycle (in a boom period, government expenditure is likely to fall as
there is less demand for benefits (e
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JSA) and tax revenue is likely to rise
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● Debt interest payments (national debt also influences government spending
as interest has to be paid on debt and if the government continues to
overspend there will be a cost for future generations
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g
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● Fiscal policy = the deliberate manipulation of government spending and
taxation in order to influence the level of AD in the economy
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● Expansionary fiscal policy shifts the AD curve outwards by increasing
government spending or cutting taxes
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➔ Increase investment by cutting business taxes
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g
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● Fiscal policy can be used to prevent AD collapsing in a recession and to
prevent bubbles in growth and markets from getting too big
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However, governments
also sometimes miscalculate the start of a boom and raise taxes too early
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2
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● Exports = an injection into the circular flow of income, as the goods and
services sold abroad enters the domestic flow of income
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● If the value of imports exceeds the value of exports - as is the case in the UK then the net exports figure will be negative
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● Increase in real income abroad (increased exports)
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● Exchange rates - SPICED
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in the short run the PED for exports and imports tends to be low
- e
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due to a lack of available substitutes or international trade deals)
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● Changes in the global economy (e
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a recession in the USA will lead to the
USA buying fewer exports from the UK and they will attempt to export more
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This was also seen between 2012-2014 due to
the slow growth in the Eurozone, which affected the UK’s exports
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Higher
quality of design and manufacture = increased exports (e
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Germany)
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● Leading receivers of the UK’s exports = Germany, the Netherlands, France
and the USA
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● Leading suppliers of imports to the UK = Germany, China, USA and the
Netherlands
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● The UK target for trade is for it to be balanced (exports = imports)

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