2.2.1 - The Characteristics Of AD

Question 1

What Is Aggregate Demand (AD)?
(3 Points)

Answer 1

~ Total demand for a countries goods or services at a given price level in a given time period.

~ Is a measure of total expenditure on a countries goods or services.

~ C + I + G + (X-M).

Question 2

Why Is The AD Curve Downward Sloping?
(4 Points)

Answer 2

~ Inverse relationship between the price level and real GDP.

~ Wealth effect.

~ Trade effect.

~ Interest rate effect.

Question 3

What Is The Wealth Effect?
(2 Points)

Answer 3

~ As the price level decreases, the purchasing power of income increases. Vice versa.

~ Increasing consumption.

Question 4

What Is The Trade Effect?
(2 Points)

Answer 4

~ As the price level decreases, exports become more competitive and imports become less competitive. Vice versa.

~ Increasing exports, reducing imports.

Question 5

What Is The Interest Rate Effect?
(2 Points)

Answer 5

~ As the price level decreases, interest rates can be kept lower in the economy due lower inflation. Vice versa.

~ Lower interest rates stimulate higher consumption and investment and reduces the value of the exchange rate, boosting net export performance.

Question 6

What Do Movements Along The AD Curve Look Like?

Answer 6

Question 7

What Causes Shifts In The AD Curve?
(2 Points)

Answer 7

~ An increase or decrease in C + I + G + (X-M).

~ Not to do with changes in the price level.

Question 8

What Do Shifts In The AD Curve Look Like?

Answer 8