Term
|
Definition
| when market forces (D&S) alone fail to allocate scarce resources efficiently meaning either too much or not enough goods are consumed/produced. |
|
|
Term
| Typical cases of Market Failure |
|
Definition
The existence of
1) monopoly power
2) externalities
3) public, merit and demerit goods |
|
|
Term
|
Definition
| Policies aimed at influencing the level of AD in order to affect growth, employment and inflation. They include Fiscal and monetary policy |
|
|
Term
|
Definition
| Government spending policies that influence macroeconomic conditions. These policies affect tax rates and government spending, in an effort to control the economy. |
|
|
Term
|
Definition
| A policy that controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. |
|
|
Term
| Monetary policy is referred to as either being expansionary or contractionary |
|
Definition
E = increases the total supply of money in the economy more rapidly than usual.
C = expands the money supply more slowly than usual or even shrinks it |
|
|
Term
| The purpose of Monetary Expansionary Policy |
|
Definition
| Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding |
|
|
Term
| The purpose of Monetary Contractionary Policy |
|
Definition
| Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. |
|
|
Term
|
Definition
1) Loss of purchasing powers
2) Saved money will be worthless
3) Reduce international competitiveness - exports prices rise-
4) Labour unrest between unions and management to increase the wages |
|
|
Term
|
Definition
1) Unemployment - Low AD then more workers lay of there jobs-
2) Reduce the consumption - consumers might wait until the prices drop further-
3) Investment will decrease - less prices, business obtain less profit-, causing confidence to fall and lay of workers-
4- Cost to debtors - The value of the loan will value more - |
|
|
Term
|
Definition
Total goods and services demanded at different price levels over a period of time-
Formula AD = C + I + G + (x-m) |
|
|
Term
| What causes changes in Consumption? |
|
Definition
1) The level of real disposable household income
2) Interest rates and the availability of credit
3) Consumer confidence
4) Changes in household financial wealth
5) Changes in employment and unemployment |
|
|
Term
| C: Consumers' expenditure on goods and services: |
|
Definition
| This includes demand for consumer durables (e.g. washing machines, audio-visual equipment and motor vehicles & non-durable goods such as food and drinks which are “consumed” and must be re-purchased). |
|
|
Term
|
Definition
| This is investment spending by companies on capital goods such as new plant and equipment and buildings. Investment also includes spending on working capital such as stocks of finished goods and work in progress. |
|
|
Term
|
Definition
| This is government spending on state-provided goods and services including public and merit goods. Decisions on how much the government will spend each year are affected by developments in the economy and also the changing political priorities of the government. |
|
|
Term
|
Definition
| Net exports (X-M) reflect the net effect of international trade on the level of aggregate demand. When net exports are positive, there is a trade surplus (adding to AD); when net exports are negative, there is a trade deficit (reducing AD). The UK economy has been running a large trade deficit for several years now as has the United States. |
|
|
Term
| Aggregate demand shocks: Causes |
|
Definition
1) A capital investment boom e.g. a construction boom to increase the supply of new houses or to build new commercial and industrial buildings.
2) A rise or fall in the exchange rate – affecting net export demand and having follow-on effects on output, employment, incomes and profits of businesses linked to export industries.
3) A consumer boom abroad in the country of one of our major trading partners which affects the demand for our exports of goods and services.
4) A large boom in the housing market or a slump in share prices.
5) An unexpected cut or an unexpected rise in interest rates. |
|
|
Term
| Demand-pull inflation: With Diagram |
|
Definition
Demand-pull inflation is likely when there is full employment of resources and aggregate demand is increasing at a time when SRAS is inelastic. This is shown in the next diagram:
[image]
|
|
|
