2.2 - The characteristics of AD

Question 1

AD =

Answer 1

C + I + G + (X - M)

Question 2

Aggregate demand

Answer 2

The total value of planned expenditure in an economy over a period of time

Question 3

Consumption

Answer 3

The spending by households on goods and services. It is influenced by factors like income, interest rates, and consumer confidence.
(all spending by consumers)

Question 4

Investment

Answer 4

• Refers to spending by firms on capital goods, used to increase their future production; or additions to the stock of capital goods
• It is influenced by interest rates, business expectations, and government policies.

Question 5

Government Spending

Answer 5

This represents government expenditure on public goods and services, such as education, defence, and infrastructure.

Question 6

Net Exports (X-M)

Answer 6

This accounts for the difference between a country’s exports (X) and imports (M). A positive value indicates a trade surplus, while a negative value indicates a trade deficit.

Question 7

Relative importance of consumption

Answer 7

In many economies, consumption is the largest component of AD. It tends to be stable and less volatile than other components.

Question 8

Relative importance of investment

Answer 8

Investment can be highly volatile, especially during economic downturns when businesses may delay or reduce capital expenditures.

Question 9

Relative importance of government spending

Answer 9

Government spending can be used as a policy tool to stabilise the economy during recessions and boost AD.

Question 10

Relative importance of net exports

Answer 10

In open economies, the balance of trade can significantly impact AD. Countries with trade surpluses (X > M) contribute positively to AD, while those with trade deficits (X < M) detract from AD.

Question 11

The AD Curve

Answer 11

The Aggregate Demand curve shows the relationship between the overall price level (P) in the economy and the quantity of Real GDP demanded (Y). It typically slopes downward, indicating that as prices rise (inflation), the quantity of Real GDP demanded falls, and vice versa.

Question 12

Movement Along the AD Curve

Answer 12

This occurs when there is a change in the price level (P) while other factors affecting AD remain constant. A change in P leads to a change in the quantity of Real GDP demanded, but the AD curve itself does not shift.
Eg: due to inflation

Question 13

Shift of the AD Curve

Answer 13

This occurs when factors other than the price level change, leading to a shift in the entire AD curve. These factors include changes in components of aggregate demand.