2.2 Aggregate Demand (AD)

Question 1

Define Aggregate Demand.

Answer 1

The total planned spending in an economy on goods and services over a period of time a certain price level

Question 2

What is the equation for AD?

Answer 2

C + I + G + (X - M)

Question 3

Define Consumption and list the factors affecting it.

Answer 3

Spending on consumer goods and services by households.
Factors: consumer confidence, interest rates, income tax

Question 4

Define Business Investment and list the factors affecting it.

Answer 4

Firms expenditure on capital goods and services.
Factors: Interest rates, corporation tax, business confidence

Question 5

Define Government Spending and list the factors affecting it.

Answer 5

Expenditure on public goods and services.
Factors: Inflation, Tax revenue, Government objectives

Question 6

Define Net Trade and list the factors affecting it.

Answer 6

The difference between exports and imports.
Factors: exchange rates

Question 7

Why is the AD curve downward sloping?

Answer 7

Consumers are price sensitive

Question 8

Using at least 2 links, explain what should happen to AD if there is a fall in corporate profits.

Answer 8

1. Business Confidence will fall
2. Businesses will reduce their spending and investments
3. AD should decrease

Question 9

Using at least 2 links, explain what should happen to AD is there is a fall in the exchange rate.

Answer 9

1. Imports get more expensive and exports are cheaper.
2. Domestic goods become cheaper so consumers are more likely to buy them
3. AD should rise