3.2 - Variations in Economic Activity

Question 1

Aggregate Demand (AD)

Answer 1

The total value of goods and services demanded by different groups at a given price level in an economy. It is the sum of the expenditure categories that make up GDP at a specific price level

Aggregate demand = C + I + G + (X − M)

Question 2

Reasons that explain the negative slope of the aggregate demand curve

Answer 2

The wealth effect
The interest rate effect
The net balance effect

Question 3

Wealth effect

Answer 3

As the average price level falls, the wealth of participants in the economy increases in real terms as their ability to purchase goods and services improves. The real value of assets, like property or stock, is now higher.

Question 4

Interest Rate Effect

Answer 4

At lower price levels, interest rates are lower too, giving people more disposable income to spend and with which to demand higher volumes of output. The incentive to save is also lower.

Question 5

Net Balance from Effect

Answer 5

A lower price level makes goods and services relatively cheaper for foreign countries to buy. Therefore, the demand for exports rises and the demand for imports from abroad falls, increasing the net trade balance and leaving it in an overall better position.

Question 6

Determinants of Consumption

Answer 6

Confidence, Unemployment, Real Interest rates, Wealth, Personal taxes, level of household indebtedness, expectations of future price levels,

Question 7

Investment

Answer 7

Investment is the expenditure by firms on capital stock, such as building factories and purchasing machinery. It is the planned investment for expansion.

Question 8

Determinants of Investment

Answer 8

Interest rates, Business confidence, Technology, Business taxes, Level of corporate indebtedness

Question 9

Determinants of Government Spending

Answer 9

Political priorities

Question 10

Determinants of Net exports

Answer 10

Income of trading partners, Exchange rates, Changes in trade policies

Question 11

Exchange rate

Answer 11

The value of a currency in terms of another
Ex: 1€ (EUR) = .84 £(GBP).

Question 12

Aggregate Supply (AS)

Answer 12

The total output that all firms in a country are able to produce at any given price level.

Question 13

Short Run Aggregate Supply (SRAS)

Answer 13

The supply of the nation in the short run, or when resource prices for most firms will remain constant.

Question 14

Determinants of short-run aggregate supply (SRAS)

Answer 14

resource prices
government intervention
government subsidies
supply shocks.

Question 15

Inflationary Gap

Answer 15

Where the economy overheats, and produces above full employment. It creates upward pressure on the price level.