2.2 AD

Question 1

Define Aggregate Demand (in words)

Answer 1

The total amount of spending on goods and services produced in an economy during a period of time

Question 2

Define Consumption

Answer 2

Total household spending

Question 3

Define disposable income

Answer 3

The income that households have to spend on consumption and saving after having paid taxes

Question 4

Define average propensity to consume

Answer 4

The proportion of income spent on consumption

Question 5

Define marginal propensity to consume

Answer 5

The proportion of additional income spent on consumption (change in spending following a change in income)

Question 6

Define average propensity to save/savings ratio

Answer 6

Proportion of income saved by households

Question 7

Define savings

Answer 7

Household disposable income that is not spent

Question 8

Define marginal propensity to save

Answer 8

The proportion of an increase in disposable income that households save

Question 9

Define the wealth effect

Answer 9

An increase in spending as a result of real or perceived increase in wealth

Question 10

Define investment

Answer 10

Expenditure undertaken by firms and the government on capital goods

Question 11

Define interest rate

Answer 11

The cost of borrowing, or the reward for saving

Question 12

Define depreciation

Answer 12

The fall in value of physical capital goods over time due to wear and tear

Question 13

Define net investment

Answer 13

Gross investment minus depreciation

Question 14

Define components

Answer 14

A good used to make another good or a semi-finished good, a form of capital

Question 15

Define the aggregate demand curve

Answer 15

The relationship between the level of AD and the overall price level, showing planned expenditure at any given general price level

Question 16

What happens to consumption if real income increases?

Answer 16

Consumption increases

Question 17

How do you calculate AD from its components?

Answer 17

AD = C + I + G + (X-M)

Question 18

Name 5 causes of a fall in AD

Answer 18

Decline in household wealth
Higher interest rates
Cuts in government spending
Fall in exports
Increase in imports

Question 19

Name 4 things that would cause an increase in AD

Answer 19

Increase in house prices
Lower interest rates and better credit
Cuts in direct and indirect taxes
Depreciation of the exchange rate

Question 20

How do you calculate real disposable income?

Answer 20

Real income - tax + benefits

Question 21

What happens to consumption if savings increase?

Answer 21

There is less money available for consumption

Question 22

What does a high savings ratio mean for consumption, and therefore AD?

Answer 22

Lower consumption -> Lower AD

Question 23

Formula for APC

Answer 23

Consumption/Income x 100

Question 24

Formula for the savings ratio

Answer 24

Savings/Income x 100

Question 25

What happens to consumption and savings when interest rates rise, and why?

Answer 25

Consumption falls and savings rise because cost of borrowing and reward for saving has increased

Question 26

Define asset

Answer 26

Things owned by individuals/households that have value

Question 27

Name 5 main influences of investment

Answer 27

Rate of economic growth Confidence levels Interest rates Animal spirits Risk Access to credit Gov. decisions and bureaucracy

Question 28

When is investment logical?

Answer 28

If businesses are working at full capacity and expect demand to rise in the future

Question 29

What do business potentially face if they use past profits to fund investment?

Answer 29

Opportunity cost

Question 30

Define fiscal policy

Answer 30

Any decision that affects government spending/taxes

Question 31

Define government expenditure

Answer 31

Government spending on public goods and services e.g NHS

Question 32

What are the 2 main influences of government expenditure?

Answer 32

The trade cycle and fiscal policy

Question 33

Name 3 elements of gov. expenditure

Answer 33

Welfare protection Health (the NHS) Education

Question 34

What is a budget deficit?

Answer 34

When gov. expenditure > tax

Question 35

Can the government spend more than they earn in the short run, or the long run?

Answer 35

Only short run - otherwise lots of national debt is accumulated

Question 36

What does a budget deficit/surplus do to AD?

Answer 36

Deficit - AD increase Surplus - AD contract

Question 37

What happens to gov. expenditure in a recession?

Answer 37

Increases as more areas need more funding, e.g social welfare and education

Question 38

What is expansionary fiscal policy? and 2 examples of how it is applied

Answer 38

When G > T e.g tax cuts, spending on infrastructure

Question 39

What is expansionary fiscal policy and give 2 examples of how it is applied

Answer 39

When G > T e.g tax cuts, spending on infrastructure

Question 40

What is contractionary fiscal policy and give 2 examples of how it is applied

Answer 40

When G < T e.g raising taxes, reducing benefits

Question 41

Name 6 factors affecting the volume of exports

Answer 41

Economic cycle Exchange rate Quality of goods Productivity Relative inflation Protectionism

Question 42

What happens to AD when there is a trade surplus/deficit?

Answer 42

Surplus - increase AD Deficit - decrease AD