2.2 aggregate demand

Question 1

aggregate demand

Answer 1

total spending (expenditure) or total demand in the economy in a period of time (usually 1 year)

Question 2

AD formula

Answer 2

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

Question 3

AD curve shifts and movement

Answer 3

Shift: changes in non-price factors
Movement: changes in price level (extension, contraction)

Question 4

AD components

Answer 4

• consumption (C) - household spending on goods and services
• investment (I) - spending by firms on capital goods
• government spending (G) - public sector expenditure
• exports minus imports (X-M) - net trade

Question 5

factors affecting consumption

Answer 5

• disposable income
• interest rates
• consumer confidence
• wealth effect
• inflation
• taxation
• exchange rates

Question 6

wealth effect

Answer 6

when an individuals wealth changes due to changes in house or share prices so more/less valuable assets (positive/ negative wealth effect)

Question 7

factors affecting investment

Answer 7

• interest rates
• animal spirits (Keynes) - business/ consumer confidence
• government incentives such as subsidies
• technology advancements
• demand from consumers

Question 8

gross and net investment

Answer 8

gross investment = total spending on new capital goods before accounting for depreciation
net investment = gross investment minus depreciation (the reduction in the value of existing capital due to being used)

Question 9

factors affecting government spending

Answer 9

• fiscal policy (gov spending, borrowing and taxation to influence the economy)
• economy stability such as recession where interest rates decrease, lower demand for goods and services

Question 10

factors affecting exports and imports

Answer 10

• exchange rates (WIDEC- improves uk net trade balance as imports more expensive- reduces trade deficit) (SPICED- worsens uk net trade balance as imports cheaper- increases trade deficit)
• real incomes (if increases, net trade balance worsens as demand increases for imports in uk)