2.2.1 Aggregate Demand

Question 1

Define Aggregate Demand

Answer 1

Total level of planned real expenditure on goods and services, produced in a country, within a given time period

Question 2

Name the 4 components of Aggregate demand

Answer 2

C+G+I+(X-M)

• Household spending on goods and services i.e. Consumption (C)
• Gross fixed Capital Investment Spending and Value of the Change of Stocks (I)
• Goverenment Spending on Public Serivce (G)
• Exports of Goods and Services (X) (Minus imports (M))

Question 3

What was the Largest Element of Expenditure across the UK Economy 2017?

And it accounted for x% of the total GDP

Answer 3

Household consumption

63%

Question 4

In 2017 Government spending accounted for x% and investment y% of total GDP

Answer 4

G=18%

I = 17%

Question 5

Describe what is on the X and Y axis on an Aggregate Demand Curve

Answer 5

Y= General Price Level

X= Real GDP

Question 6

A Rise in what, would cause a contraction in AD

A Fall in what cause in a expansion if AD

Answer 6

Price Level

Question 7

What 3 factor cause AD to slope downwards

Answer 7

Real Income Effect

Balance of Trade Effect

Interest rate effect

Question 8

Why would the real income effect cause the AD curve Slopes Downwards

Answer 8

As price level, real value of income rise, and consumers are able to buy more of what they want/need

Know as real money balance effect of real income

Question 9

How does Balance of trade effect cause the AD curve Slopes Downwards

Answer 9

A fall in the relative price level of Country X could make foreign-produced goods/service more expensive, causing a rise in export and fall in imports - trade balance will become more positive as a result of change in price level

Question 10

Why does Interest rate effect cause the AD curve to slope Downwards

Answer 10

If price Inflation is low and this leads to reduction in interest rate, there is interest rate may also cause exchange rarw to depreciate and improve export sales

Question 11

List 4 reasons for a fall in AD and hence an inward shift in Demand curve - which will reduce national output at all price levels

Answer 11

• Fall in net export (M>X)
• Cut in the 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 12

List 4 reasons for an increase in AD, and hence outward shif in supply curve - will raise national output at all price levels

Answer 12

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

Question 13

What is an external shock

Answer 13

Many unexpected events cause changes in demand, output and employment

Question 14

5 external shock that effect Aggregate demand

Answer 14

• A large rise/fall in value of exchange rate
• A recession, slowdown or boom in a nation’s key trading partner countries
• A Slump in housing maket/construction sector of a country
• An event such a the Global Financial Crisis which cause a steep fall in the supply of credit avaiable to business/households
• A large change in commodity price for a country that is a commodity exporter