2.2.1 Aggregate Demand

Question 1

What is Aggregate Demand?

Answer 1

total demand in the economy

Question 2

What are 4 components of AD?

Answer 2

Consumption
Government spending
Investment
Net exports

Question 3

What % of AD is comprised of each component?

Answer 3

1. Consumption
2. Net exports
3. Government spending
4. Investment

Question 4

Explain why a 1% increase in consumption would have a bigger impact on the economy than a 1% increase in investment

Answer 4

consumption is instantaneous and happens in the short term and investment will show impacts in the long term

Question 5

Explain 3 reasons why the AD curve is downward sloping

Answer 5

• higher prices, fall in the value of real income so goods and services are less affordable
• high inflation, high price level, foreign goods are cheaper, more imports, higher deficit, fall in AD
• higher inflation, higher interest rates, loans become expensive, saving becomes attractive

Question 6

What could have caused such a contraction?

Answer 6

• a rise in price level

Question 7

What could have caused such an expansion?

Answer 7

• a fall in price level