7.3 The determinants of AD

Question 1

What is the shape of a normal demand curve?

What direction does it go?

Answer 1

Straight line, downwards sloping

Question 2

What is price level?

Answer 2

the average of prices for all goods and services in an economy.

Question 3

What is real national output? (RNO)

Answer 3

the output of the economy taking into account inflation.

Question 4

How do you calculate real national output? (RNO)

Answer 4

Nominal National Output/Average Price Level

Question 5

What is the equation for Aggregate Demand?

Answer 5

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

Question 6

What factors determine the level of consumption in a household? (6)

Answer 6

Income
Interest rates
Levels of personal debt
Levels of personal wealth
Confidence
Marginal propensity to consume/save

Question 7

What factors affect consumption? (not in household) (5)

Answer 7

Interest rates

Consumer confidence

Taxation

Wealth - wealth effects

Unemployment

Question 8

In economics, any disposable household income that is not used for consumption is said to have been ______.

Answer 8

Saved

Question 9

What are the factors that affect investments? (8)

Answer 9

Interest rates
Confidence
Government incentives
Economic growth
Profit levels
Price of capital equipment
Technology
Tax

Question 10

What is the accelerator effect?

Answer 10

shows the relationship between Gross Domestic Product (GDP) and the rate of investment

It states that a rise in GDP will lead to a proportionately larger increase in investment

Question 11

What is the accelerator theory?

Answer 11

The accelerator theory of investment states that increases and decreases in the rate of growth of national income will lead to even larger increases in the level of investment. If growth in national income increases, then investment will also increase and vice versa

Question 12

What does the government spend money on within the economy?

Answer 12

Public services

Local government services

Welfare expenditure

Interest on debt

Question 13

How is government expenditure financed?

Answer 13

Through taxation. Government spending and taxation makeup balanced budget.

Question 14

What does NET exports stand for?

Answer 14

(Exports – Imports) or (X-M)

Question 15

Why do we do (Exports – Imports) or (X-M)?

Answer 15

We are only concerned with demand and output generated within a country, hence imports are deducted

Question 16

What factors affect NET exports? (5)

Answer 16

Country productivity
Exchange rates
Ecconomic growth in other countries
Extent of free trade
Relative inflation

Question 17

What happens when the AD curve shifts?

Answer 17

there is a change in any of the components of AD (C, I, G, X or M)

Question 18

What happens when there’s a shift along the AD curve?

Answer 18

A change in the price level

Question 19

What does a rise in price level mean for aggregate demand?

Answer 19

Contraction in AD

Question 20

What does a fall in price level mean for aggregate demand?

Answer 20

An expansion in aggregate demand.

Question 21

What does an increase in any of the components of AD do to the curve?

Answer 21

The AD curve will shift outwards.

Question 22

What does an decrease in any of the components of AD do to the curve?

Answer 22

The AD curve will shift inwards.

Question 23

What does a fall in price level mean for aggregate demand?

Answer 23

Expansion in AD

Question 24

What is MPC?

Answer 24

Marginal propensity to consume

Question 25

How do you calculate MPC?

Answer 25

MPC = change in consumption / change in income

Question 26

What is the marginal propensity to consume (MPC)?

Answer 26

The marginal propensity to consume is the change in consumer spending due to a change in disposable income

Question 27

What is MPS?

Answer 27

Marginal propensity to save

Question 28

How do you calculate MPS?

Answer 28

MPS = change in savings / change in income

Question 29

What is marginal propensity to save (MPS)?

Answer 29

The marginal propensity to save is the change in household saving resulting from a change in household disposable income