4.5 - Agreggate Demand

Question 1

Components of aggregate demand

Answer 1

C I G X - M
Consumer expenditure
Investment expenditure
Government expenditure
Net export
Net import

Question 2

Reasons why AD is downward slope

Answer 2

Read balance effect (avg price level increases, consumers, producers, firms, foreign sector have less spending power, reducing quantity of real output demanded)

International competitiveness (avg price level increases, economy likely to export less and import more)

Rate of interest impact (avg price level increases, interest increases, consumers and producers likely save more and consume less)

Question 3

Define consumption and its influencers

Answer 3

Total household spending on goods and services within the economy.

REAL DISPOSABLE INCOME
RATE OF INTEREST
CONSUMER CONFIDENCE
WEALTH EFFECTS

RICW

Question 4

Define average propensity to consume

Answer 4

Proportion of income consumers devoted to consumption

Question 5

Define investment and its components

Answer 5

Expenditure undertaken by firms to add to the capital stock

Interest rate
Access to credit
Government policy and regulations
Rate of economic growth
Business confidence
Keynes animal spirit

BAG RIK

Question 6

Define government spending and its components

Answer 6

Government fiscal policy
Trade cycle

GnT

Question 7

Define net trade and its components

Answer 7

Difference between value of goods exported and imported from abroad

Real disposable income at home
Real disposable income abroad
Exchange rate
Government restriction on free trade
Non-price factor (quality)
State of the world economy

RRE GNS

Question 8

Define aggregate demand

Answer 8

Total amount of goods and services demanded in the economy at a given time and price level.

Question 9

Define marginal propensity to save

Answer 9

Proportional of additional consumer income devoted to saving

Question 10

Define circular flow of income

Answer 10

A model which shows how money moves through the economy between businesses, households, and the government. Shows the relationships between consumption, production and income generation.

Question 11

Define withdrawals

Answer 11

Money flows out of the circular flow in form of savings, taxations, and imports.

Question 12

Define injection

Answer 12

Money flows into the circular flow of income, in the form of spending, exports, investment