2.2.1 The Characteristics of AD

Question 1

What is Aggregate demand

Answer 1

total planned expenditure on final g/s in an economy at a given price level

Question 2

What is the equation for AD

Answer 2

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

Question 3

What are the components of AD

Answer 3

consumption, investment, government spending, net exports

Question 4

What is consumption

Answer 4

spending on g/s
65% of UK’s GDP

Question 5

What is investment

Answer 5

purchase of capital goods by firms to create other g/s
20% of UK’s GDP

Question 6

What is gov spending

Answer 6

demand generated by gov spending
15-20% of UK’s GDP

Question 7

what are net exports

Answer 7

exports minus imports, should balance to 0% but UK has net reduction

Question 8

What does AD curve look like and why

Answer 8

Slopes down, as price falls the purchasing power of money increases so consumption increases (real balance effect)

Question 9

What happens at low prices

Answer 9

low interest rates, currency depreciation, and increasing international competitiveness

Question 10

What causes shifts in AD

Answer 10

Non price factors that impact the components of AD
E.g. taxation, confidence, interest rates, employment, credit, deficit, exchange rates, trade barriers, productivity ect