2.2.1 - The Characteristics Of AD

Question 1

What Is Aggregate Demand (AD)?

Answer 1

Total level of spending in the economy at any given price.

Question 2

What Is The Formula For AD?
(2 Points)

Answer 2

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

~ C = Consumption, I = Investment, G = Government Spending, X = Exports & M = Imports.

Question 3

What Happens To Economic Growth If AD Increases Or Decreases?
(2 Points)

Answer 3

~ Increases = Economic growth occurs.

~ Decreases = Economic growth slows down.

Question 4

What Is Consumption (C) & Its % Of AD?
(2 Points)

Answer 4

~ Consumer spending on goods and services.

~ Makes up 60% of AD.

Question 5

What Is Investment (I) & Its % Of AD?
(2 Points)

Answer 5

~ Spending on capital goods by firms.

~ Makes up 14% of AD.

Question 6

What Is Government Spending (G) & Its % Of AD?
(2 Points)

Answer 6

~ Spending by the government in the economy.

~ Makes up 25% of AD.

Question 7

What Is Net Exports (X - M) & Its % Of AD?
(2 Points)

Answer 7

~ Exports - Imports.

~ Makes up 1% of AD.

Question 8

What Does An AD Curve Look Like?

Answer 8

Question 9

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

Answer 9

~ Income effect.

~ Substitution effect.

~ Real balance effect.

~ Interest rate effect.

Question 10

What Is The Income Effect?
(2 Points)

Answer 10

~ A rise in prices is not immediately matched by a rise in income.

~ Reducing people’s real income, meaning they can afford to buy less, leading to a contraction in demand.

Question 11

What Is The Substitution Effect?
(2 Points)

Answer 11

~ When domestic prices rise, less foreigners will want to buy exports and more domestic residents will buy imported foreign goods as they are cheaper.

~ The rise in imports and fall of exports will decrease net exports, contracting AD.

Question 12

What Is The Real Balance Effect?
(3 Points)

Answer 12

~ Rise in prices means that the amount people have saved up will no longer be worth as much.

~ Will offer less security.

~ They will now want to save more, reducing spending therefore causing a contraction in AD.

Question 13

What Is The Interest Rate Effect?
(2 Points)

Answer 13

~ Higher interest rates therefore mean more people will save and less will borrow, contracting AD.

~ If supply stays the same then interest rates will rise due to higher demand.

Question 14

What Causes A Movement Along The AD Curve?

Answer 14

Change in prices.

Question 15

What Are The 2 Types Of Movements?

Answer 15

~ Contraction.

~ Extension.

Question 16

What Do Movements Look Like On The AD Curve?

Answer 16

Question 17

What Causes A Shift In The AD Curve?

Answer 17

Change in any of the determinants (C + I + G + (X - M) of AD.

Question 18

What Do Shifts Look Like On The AD Curve?

Answer 18