AD and the level of economic activity

• What are the factors that influence the level of economic activity?

  Employment, confidence, events, and other factors like taxes and interest rates
• How does employment influence economic activity?

  It influences production and consumption
• What role does confidence play in economic activity?

  It influences the level of spending and investment
• How do events like natural disasters or Christmas affect economic activity?

  They influence the level of consumer spending
• What are some other factors that influence borrowing, saving, or spending?

  Taxes and interest rates
• What is the multiplier process in economics?

  • Occurs with new demand in an economy
  • Leads to an injection of more income into the circular flow
  • Results in economic growth, job creation, and increased spending
• What does the multiplier effect refer to?

  It refers to how an initial increase in AD leads to a larger increase in national income
• Why does the multiplier effect occur?

  Because one person's spending is another person's income
• What is the multiplier ratio?

  It is the ratio of the rise in national income to the initial rise in AD
• How does spare capacity in an economy affect the multiplier?

  It makes SRAS elastic, leading to a larger multiplier
• What happens if SRAS is inelastic?

  The multiplier effect is likely to be smaller than its potential
• What is a 'reverse' multiplier?

  It refers to a withdrawal of income that leads to a larger decrease in income for the economy
• What is the marginal propensity to consume (MPC)?

  • It measures how much a consumer changes their spending following a change in income
  • A higher MPC leads to a larger multiplier
• How can the government influence the MPC?

  By changing the rate of direct tax
• What is the relationship between marginal propensity to save (MPS) and marginal propensity to consume (MPC)?

  • MPS + MPC = 1
  • If consumers save more, the multiplier will be smaller
• What is one formula to calculate the multiplier?

  Multiplier = \( \frac{1}{1 - MPC} \)
• If consumers spend 0.6 of every £1 they earn, what is the multiplier?

  1. 5
• What does a multiplier of 2.5 mean in terms of income generation?

  Every £1 of income generates £2.50 of new income