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 components

Answer 3

Total planned household spending

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