2-2 Aggregate demand

Question 1

What are the components of AD?

Answer 1

• Consumer spending, C
• Investment, I
• Government spending, G
• Exports minus imports, (X-M)

Question 2

What is consumer spending?

Answer 2

• How much consumers spend on goods and services

Question 3

What is disposable income?

Answer 3

• The amount of income consumers have left after taxes and social security charges have been removed.

Question 4

What is a consumer’s marginal propensity to consume?

Answer 4

• How much a consumer changes their spending following a change in income.

Question 5

What is a consumer’s marginal propensity to save.

Answer 5

• The proportion of each additional pound of household income that is used for saving.
• A consumer’s marginal propensity to consume added to the marginal propensity to save is equal to 1.

Question 6

What influences consumer spending?

Answer 6

• Interest rates
• Consumer confidence
• Wealth effects

Question 7

What is gross investment?

Answer 7

• The amount that a firm invests not accounting for depreciation.

Question 8

What is net investment?

Answer 8

• The amount that a firm invests accounting for depreciation.

Question 9

What influences investment?

Answer 9

• The rate of economic growth
• Business expectations and confidence
• Demand for exports
• Interest rates
• Access to credit
• The influence of government and regulations

Question 10

What influences government expenditure?

Answer 10

• The trade cycle
• Fiscal policy

Question 11

What is net trade?

Answer 11

• The value of the current account on the balance of payments. A positive value indicates a surplus, whilst a negative value indicates a deficit.

Question 12

What influences net trade balances?

Answer 12

• Real income
• Exchange rates
• State of the world economy
• Degree of protectionism
• Non-price factors.