2.2 - Aggregate Demand

Question 1

What is the substitution effect

Answer 1

If prices of UK goods rise, exports fall and imports increase resulting in a fall in AD

Question 2

What is the real balance effect

Answer 2

As prices rise, average propensity to consume falls and people spend less, meaning AD falls

Question 3

What influences consumer spending

Answer 3

Interest rates
consumer confidence
wealth effects

Question 4

What is the difference between gross and net investment

Answer 4

Gross investment is the amount of investment carried out and ignores the level of depreciation, whilst net investment is gross investment minus the value of depreciation of the asset

Question 5

What is the accelerator theory

Answer 5

The change in investment is equal to change in real income * capital/output ratio.

If economic growth is occurring, incomes will be rising and capital/output ratio will also be increasing.

Question 6

What are the factors that can affect investment

Answer 6

-Rate of economic growth (accelerator effect)
- Retained profit (corporation tax rates)
- Animal Spirits
- Access to credit
- Interest rates

Question 7

What are the two main influences of government expenditure

Answer 7

The current economic position (trade cycle)

Fiscal Policy

Question 8

What can influence the (X-M) figure in AD

Answer 8

• Real incomes (domestic and abroad)
• Protectionism policies
• exchange rates
• state of world economy