2.2.1

Question 1

What is aggregate demand?

Answer 1

The total level of spending in the economy at any given price

Question 2

What is the equation for aggregate demand?

Answer 2

AD= consumption (C) + investment (I) + government spending (G) + (X-M (net imports)

Question 3

What does the aggregate demand curve show?

Answer 3

The relationship between aggregate demand and the general price level.
It is an inverse relationship.

Question 4

What are the 3 reasons why the aggregate demand curve slopes down?

Answer 4

• Real income effect
• Balance of trade effect
• Interest rate effect

Question 5

How does the real income effect explain why the aggregate demand curve slopes down?

Answer 5

As price level falls, real value of income rises, consumers are able to buy more wants/needs.

Question 6

How does the balance of trade effect explain why the aggregate demand curve slopes down?

Answer 6

Fall in the relative price level of country X could make foregin produced goods/services more expensive, causing a rise in exports and fall in imports

Question 7

How does the interest rate effect explain why the aggregate demand curve slopes down?

Answer 7

If price inflation is low and this leads to a reduction in interest rates, there is less incentive to save and a fall in interest rates may cause the exchange rate to depreciate and improve export sales.

Question 8

An outward shift in the aggregate demand curve does what?

Answer 8

Will raise national output at all price levels

Question 9

An inward shift in the aggregate demand curve does what?

Answer 9

Will reduce national output at all price levels

Question 10

What causes a fall in aggregate demand?

Answer 10

-Fall in net imports
-Cut in real level of government spending
-Higher interest rates/ fall in the supply of credit from the banking system
-Decline in household wealth and confidence

Question 11

What causes an increase in aggregate demand?

Answer 11

-Depreciation in value of the exchange rate
-Cuts in the rate of direct and indirect taxes
-Increase in house prices and share prices
-Expansion of supply of credit and lower interest rates

Question 12

What are external “shocks”?

Answer 12

Unexpected events which cause changes in demand, output and employment.

Question 13

What are the external shocks on aggregate demand?

Answer 13

-Large rise in value of exchange rate
-Recession/slowdown/boom in nations key trading partner countries
-Slump in housing market/construction
-Large change in commodity prices for a country that is a commodity exporter