2.2 Aggregate demand

Question 1

What is Aggregate demand

Answer 1

The total spending in an economy at different price levels

Question 2

What is the equation for aggregate demand (ABBREVIATION)

Answer 2

C + I + G + ( X-M )

Question 3

What is the equation for aggregate demand (BROKEN DOWN)

Answer 3

Consumption + Investment + Government Spending + (Exports - Imports)

Question 4

What is consumption and what factors is it influenced by

Answer 4

The spending by households on goods and services.
* Income
* Interest rates
* Consumer confidence.

Question 5

What is investment and what factors is it influenced by

Answer 5

Business spending on capital goods i.e machinery, buildings, and technology
* Interest rates
* Business expectation
* Government policies

Question 6

What is government spending and what factors is it influenced by

Answer 6

Government expenditure on public goods and services, such as education, defence, and infrastructure
* Public needs
* Inflation
* Fiscal policy

Question 7

What is Net exports

Answer 7

( X - M )
The difference between a country’s total exports and total imports

Question 8

What does it mean if Net exports are (+ve) (-ve)

Answer 8

(+ve) = trade surplus
(-ve) = trade deficit

Question 9

What is the largest component of AD

Answer 9

Consumption

Question 10

What is the relation of price and real GDP on the AD curve

Answer 10

Slopes downward, indicating that as prices rise (inflation), the quantity of Real GDP demanded falls,

Question 11

What causes movement across the AD curve

Answer 11

A change in price

Question 12

What causes a shift on the AD curve

Answer 12

• Changes in consumer spending
• Business investment
• Government spending
• Net exports.

Question 13

What is disposable income

Answer 13

Income left over for an individual or household after taxes have been paid.

Question 14

What is the relationship between consumption and disposable income

Answer 14

Increase in disposable income = increase in consumption

Question 15

What does MPC stand for and what does it mean

Answer 15

Marginal propensity to consume: measures how much of disposable income a person is likely to spend on consumption, rather than saving

Question 16

What is the relationship between saving and consumption

Answer 16

Inversely proportional

Question 17

What factors affect consumption

Answer 17

• Interest rates
• Consumer confidence
• Wealth effect

Question 18

How does interest rates affect consumption

Answer 18

Lower interest rates = increase in consumer spending because borrowing costs are reduced.

Question 19

How does consumer confidence affect consumption

Answer 19

Higher consumer confidence = to increased consumer spending,
as people are more willing to make major purchases when they believe the economy is doing well.

Question 20

How does the wealth effect increase consumption

Answer 20

When the value of assets such as homes or stocks increases, consumers tend to feel wealthier and spend more (vice versa)

Question 21

Provide a real world example of the wealth effect

Answer 21

During the housing market bubble in the mid-2000s, rising home prices made many homeowners feel wealthier resulting in an increase of luxury good purchases

Question 22

What percentage of AD does consumption make up

Answer 22

60%

Question 23

What percentage of AD does investment make up

Answer 23

14%

Question 24

What percentage of AD does government spending make up

Answer 24

25%