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

[6]

Answer 3

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

Question 4

2.2 - Aggregate Demand

Determinants of investment (7)

Answer 4

• Rate of Interest: Lower rates make borrowing cheaper and retained profits less attractive.
• Business Confidence: Optimism (“animal spirits”) drives investment; pessimism reduces it based on expected sales.
• Retained Profit: High retained earnings lower the opportunity cost and are a key internal financing source.
• Government Taxes/Regulation: Lower taxes and supportive policies boost investment, while heavy regulation and crowding-out hinder it.
• Demand for Exports: Strong export demand can spur investment in capacity and technology.
• Economic Growth: Higher growth prospects encourage firms to invest.
• Technological Change: Advances and innovation drive capital investment for competitive benefits.

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