2.2.1 Aggregate Demand

Question 1

Aggregate demand

Answer 1

total demand/expenditure in economy at any given price

Question 2

Components of AD

Answer 2

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

Question 3

Relative importance of consumption in AD

Answer 3

household consumption makes up around 60% of AD

Question 4

Relative importance of government spending in AD

Answer 4

makes up around 25% of AD

Question 5

Relative importance of investment in AD

Answer 5

around 15% of AD

Question 6

Relative importance of net exports in AD:

Answer 6

1% of AD

Question 7

Why is relative importance to take into account when calculating AD?

Answer 7

A 1% increase in consumption would have a greater effect on the UK economy than a 1% increase in net exports

Question 8

Why does the AD curve slope downwards?

Answer 8

• the real balance effect (price->GDP)
• the international competitiveness argument (price-> exports)
• price -> investment

Question 9

Why does the real balance effect cause the AD curve to slope downwards?

Answer 9

• an increase in the average price level reduces the purchasing power of households, businesses, government and the foreign sector
• so this reduces the quantity of real output demanded (GDP)

Question 10

Effect of price level on exports (downslope AD curve)

Answer 10

• at higher average prices, an economy is less likely to export and more likely to import
• so this decreases AD overall

Question 11

Effect of price level on investment (downslope AD curve)

Answer 11

• at higher averages prices, the interest rate is likely to be higher
• investment (a component of AD) is lower

Question 12

Movement along the AD curve

Answer 12

• a change in the average price level in an economy

Question 13

Shift in AD curve

Answer 13

a change in the value of the components of AD

Question 14

A rise in price level…

Answer 14

causes of contraction in AD

Question 15

A fall in price level…

Answer 15

causes an expansion in AD