2.2.1 Components of Aggregate Demand

Question 1

define aggregate demand

Answer 1

the total planned expenditure on a country’s goods and services produced within an economy in a time period

Question 2

which groups spend money (demand) on goods and services

Answer 2

consumers
producers
government
foreign consumers and producers

Question 3

what are the four components of aggregate demand

Answer 3

consumption, investment, government spending, net exports

Question 4

what is the significance on consumption to GDP

Answer 4

largest component of aggregate demand in UK (just over 65% of GDP) therefore most significant to economic growth

Question 5

what is consumption

Answer 5

domestic household spending on goods and services

Question 6

what is investment

Answer 6

spending by firms on capital

Question 7

what is the significance of investment to GDP

Answer 7

accounts for around 15% of GDP in the UK per annum - smallest component of aggregate demand

Question 8

what is the significance of government spending on GDP

Answer 8

accounts for around 22% of GDP in the UK per annum

Question 9

what is the significance of net exports to aggregate demand

Answer 9

UK has a relatively large trade deficit, which reduces the value of AD
Net exports = Exports-Imports = -2%

Question 10

what is the formula for AD

Answer 10

AD = C + I + G + (X-M)

Question 11

what is real GDP

Answer 11

the total value of goods and services produced in an economy over a period of time adjusted for inflation

Question 12

what is the general price level

Answer 12

average of prices for all goods and services in an economy

Question 13

what is on the x axis on an AD curve

Answer 13

real GDP

Question 14

what is on the y axis on an AD curve

Answer 14

GPL

Question 15

what are the three reasons for an AD curve being downward sloping

Answer 15

the real balance effect
the trade effect
the interest rate effect

Question 16

describe the real balance effect

Answer 16

higher GPL, reduces real income, lower purchasing power (can buy fewer goods and services), total demand for goods and services falls

Question 17

describe the trade effect

Answer 17

higher GPL, exports more expensive to less attractive to foreign consumers, lower net exports, lower spending on goods and services

Question 18

what are interest rates

Answer 18

the cost of borrowing money, the reward for saving money and the return for lending money

Question 19

what do the central bank do when inflation is rising

Answer 19

increase interest rates to try and reduce demand

Question 20

describe the interest rate effect

Answer 20

higher GPL - interest rates rise (policy response),
lower consumption as household mortgage payments rise so less income left over, lower consumption and investment as borrowing is more expensive, lower spending

Question 21

What is movement along the demand curve caused by

Answer 21

A change in price level, causes in a shift in the AS curve

Question 22

What does a rise in price level lead to

Answer 22

A contraction in AD

Question 23

What does a fall in the price level lead to

Answer 23

Expansion in AD

Question 24

What leads to a shift in AD

Answer 24

A change in the components of AD (consumption, investment, government spending, net exports)