Demand-Side Effects Flashcards

1️⃣ Familiarise yourself with the flashcards:

  • Look through all the flashcards to see what's on both sides.
  • Make sure you understand the information on each card. If something's unclear, click the link to the revision notes at the bottom of the page for more details.

2️⃣ Test yourself:

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3️⃣ Consistently Review and Practice:

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Note: We may include questions that have multiple correct answers. It's useful to remember specific examples to understand these concepts better.

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What does aggregate demand (AD) mean?

The total spending on goods and services in the economy: consumer spending, business investment, government spending, plus exports minus imports.

How does higher government spending affect aggregate demand?

It increases AD because government spending is part of total demand. This can raise output and jobs.

How does a cut in income tax affect aggregate demand?

People keep more of their pay and spend more, so consumption rises and AD increases.

What is expansionary fiscal policy?

When the government raises spending or cuts taxes to boost AD.

What is contractionary fiscal policy?

When the government cuts spending or raises taxes to reduce AD.

How can a rise in AD affect unemployment?

Firms sell more and may hire more workers, so unemployment falls.

How can demand-side fiscal policy affect inflation?

Raising AD can increase price pressure, while cutting AD can help lower inflation.

How can higher AD affect imports and the trade balance?

People buy more, including imports, so imports rise and the trade balance can get worse.

What is the multiplier effect of government spending?

An initial rise in spending leads to extra rounds of spending, so total AD increases by more than the first amount.

What are automatic stabilisers and how do they affect AD?

Taxes and benefits that change with the economy. When the economy slows, people pay less tax and get more benefits, which supports AD.

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