2.2.1 - The Characteristics Of AD

Question 1

What Is Aggregate Demand (AD)?

Answer 1

Is the total level is spending in the economy at any given price.

Question 2

What Is AD Made Up Of?

Answer 2

Consumption (C), investment (I), government spending (G), Exports (X) and imports (M).

Question 3

What Is The Formula For AD?

Answer 3

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

Question 4

What Happens When AD Increases?

Answer 4

Economic growth has occurred.

Question 5

What Are The 4 Components Of AD?

Answer 5

~ Consumption.

~ Investment.

~ Government spending.

~ Net exports.

Question 6

What Is Consumption & What % Of AD Does It Make Up?
(2 Points)

Answer 6

~ The consumer spending on goods and services.

~ Makes up around 60% of AD.

Question 7

What Is Investment & What % Of AD Does It Make Up?
(2 Points)

Answer 7

~ The spending by businesses on capital goods, such as new equipment, buildings and working capital.

~ Makes up around 40% of AD.

Question 10

What Is Government Spending & What % Of AD Does It Make Up?
(2 Points)

Answer 10

~ The spending by the government on providing goods and services.

~ Makes up around 25% of AD.

Question 11

What Is Shown On An AD Curve?

Answer 11

The relationship between the average price level and the real GDP.

Question 11

What Is Net Exports & What % Of AD Does It Make Up?
(3 Points)

Answer 11

~ Exports - imports.

~ When imports are higher than exports this a minus figure as more money leaves the UK then comes in.

~ Makes up around 14% of AD.

Question 12

Why Does The AD Curve Slope Downwards?

Answer 12

As a rise in price leads to a contraction in demand.

Question 13

What Are The 4 Key Reasons As To Why The AD Curve Slopes Downwards?

Answer 13

~ Income effect.

~ Substitution effect.

~ Real balance effect.

~ Interest rate effect.

Question 14

What Is The Income Effect?

Answer 14

As a rise in prices is not matched straight away by a rise in income, people have lower real incomes so can afford less to buy leading to a contraction in demand.