2.2 - Aggregate Demand Content

Question 1

2.2 - Aggregate Demand

What is marginal propensity to consume (MPC)?

Answer 1

The proportion of an increase in income spent on consumption.
change in consumption / change in income.

Question 2

2.2 - Aggregate Demand

What are MPM, MPS, MPT, MPW?

Answer 2

Marginal Propensity to: Import, save, tax, withdraw.

Question 3

2.2 - Aggregate Demand

Determinants of consumption (5)

Answer 3

• Interest rates
• Consumer confidence
• Wealth effects
• Availability of credit
• Inflation

Question 4

2.2 - Aggregate Demand

Determinants of investment (7)

Answer 4

1. The rate of interest
   -> Through making new venture cheaper
   -> Through making saving retained profit less attractive
2. Business confidence
   -> If firms expect sales to increase they are more likely to invest in capital to meet that expected demand
   -> If firms expect sales to fall they will reduce investment in anticipation
   -> Animal spirts
3. Retained profit
   -> 70% of UK investment is through retained profit
   -> Firms will consider opportunity cost of investment, the more retained profit the more likely they are to invest
4. Government taxes / regulation
   -> Cutting tax on profits will increase investment as profits are higher due to lower costs
   -> Governments can encourage investments by guarenteeing loans used to invest with
   -> Excessive regulation decreases profitablity and thus investment as costs are increased
   -> Crowding out
5. Demand for exports.
6. Rate of economic growth
7. Technological change

Question 5

2.2 - Aggregate Demand

Determinants of Government Spending [5]

Answer 5

• Political Factors: Government priorities, party policies, and political stability can significantly impact spending decisions.
• Social Needs: Demographic changes, such as aging populations, can increase expenditure on healthcare and pensions. Example: Japan’s rising healthcare costs due to its aging population.
• Economic Conditions: Inflation rates, unemployment levels, and economic growth can affect government spending. Example: Increased unemployment benefits during high unemployment periods.
• Debt Levels: High public debt can constrain government expenditure due to the need for debt servicing. Example: Greece’s austerity measures post-2008 financial crisis.
• External Factors: International events, trade relations, and global economic conditions. Example: Increased defense spending during geopolitical tensions.

Question 6

2.2 - Aggregate Demand

What is the primary relationship between savings and consumption in economics?

Answer 6

As savings increase, consumption tends to decrease, and vice versa.

Question 7

2.2 - Aggregate Demand

What is wealth effect?

Answer 7

When a change in personal wealth influences consumer spending and economic growth.

Question 8

2.2 - Aggregate Demand

What are the factors affecting G? (TC,R,B)

Answer 8

• Trade cycle - eco growth fluctuates within different phases:
• Recession - G ↑ to increase D ∴ reducing unemployment - G ↑ more spending on unemployment benefits
• Booms - G ↓ to decrease AD and reduce inflation

Question 9

2.2 - Aggregate Demand

Factors influencing net trade? (QPREPS)

Answer 9

• Quality and Innovation
• Prices (high prices of UK goods = less competitive).
• Real Income (inc. M)
• Exchange Rates (SP or WP?).
• Protectionism (means less X).
• State of world economy