1.2 Aggregate Demand

Question 1

What is aggregate demand?

Answer 1

The total demand for goods and services within a particular market or economy.

Aggregate demand is composed of consumption, investment, government spending, and net exports.

Question 2

What are the components of aggregate demand?

Answer 2

• Consumption
• Investment
• Government Spending
• Net Exports

Each component contributes to the overall demand in the economy.

Question 3

How does the price level affect aggregate demand?

Answer 3

There is an inverse relationship; as the price level rises, aggregate demand falls, and vice versa.

This relationship can be illustrated with a downward-sloping aggregate demand curve.

Question 4

What does a rightward shift in the aggregate demand curve indicate?

Answer 4

An increase in aggregate demand due to factors such as increased consumer confidence or government spending.

Factors causing shifts can include changes in fiscal policy, monetary policy, or external economic conditions.

Question 5

What does a leftward shift in the aggregate demand curve indicate?

Answer 5

A decrease in aggregate demand due to factors such as reduced consumer spending or increased taxes.

This shift can also result from negative economic shocks or decreased export demand.

Question 6

Evaluate the relationship between changes in income and consumption.

Answer 6

As income increases, consumption generally increases, reflecting a positive correlation.

This relationship can be influenced by the marginal propensity to consume.

Question 7

What role do expectations play in aggregate demand?

Answer 7

Expectations about future economic conditions can influence consumer and business spending decisions.

Positive expectations can lead to increased spending, while negative expectations can result in reduced demand.