AD/AS

Question 1

What is the expenditure method for calculating aggregate demand?

Answer 1

Consumer expenditure + Investment expenditure + Government expenditure + Net exports

This method sums up all expenditures in an economy to measure aggregate demand.

Question 2

What are the three effects that explain the negative slope in aggregate demand?

Answer 2

• The wealth effect
• The interest rate effect
• The net balance effect

These effects illustrate how changes in price levels can influence overall demand in the economy.

Question 3

What are the five factors that determine investment?

Answer 3

• Interest rates
• Business confidence
• Technology
• Business taxes
• Level of corporate debt

Each factor plays a significant role in influencing business investment decisions.

Question 4

How do interest rates affect business investment?

Answer 4

They determine whether businesses invest or not.

Higher interest rates can discourage investment due to increased borrowing costs.

Question 5

What role does business confidence play in investment decisions?

Answer 5

The health of the economy influences future planning and spending by businesses.

A looming recession can lead firms to refrain from expansion.

Question 6

How does technology impact aggregate demand?

Answer 6

Investment in technology causes growth and allows efficient resource use, shifting AD to the right.

However, technological investment can be costly and requires training.

Question 7

What effect do business taxes have on investment?

Answer 7

Higher taxes reduce excess money for firms to spend, discouraging investment.

Lower taxes can encourage firms to invest more.

Question 8

How does the level of corporate debt influence aggregate demand?

Answer 8

High corporate debt can shift AD to the right in the short run but may shift it left in the long run.

This reflects the balance between investment and repayment pressures.

Question 9

What impact does government spending have on the economy?

Answer 9

It affects aggregate demand and depends on the government’s economic priorities.

Government spending can stimulate or contract the economy.

Question 10

How do net exports influence aggregate demand?

Answer 10

They can generate growth, particularly in countries reliant on their trade balance.

A healthy export market can boost AD.

Question 11

What is the relationship between the income of trading partners and net exports?

Answer 11

If AD shifts right for one country, the same occurs for its trading partners.

A slowdown in one country can negatively impact its trading partners’ exports.

Question 12

How do exchange rates affect aggregate demand?

Answer 12

Appreciation increases costs for imports, while depreciation can shift AD to the right.

Exchange rates directly influence the price competitiveness of goods.

Question 13

What are some ways countries can restrict trade to influence aggregate demand?

Answer 13

• Imposing tariffs on imports
• Restricting the number of imports through quotas

Such policies can lead to a decrease in aggregate demand.

Question 14

What is Aggregate Demand (AD)?

Answer 14

The total demand for goods and services produced in an economy, consisting of consumption expenditure, government expenditure, investment spending, and spending on net exports.

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

Question 15

What shapes the aggregate demand curve?

Answer 15

The aggregate demand curve is influenced by factors such as the wealth effect, interest rate effect, and net balance effect.

Question 16

What is the wealth effect?

Answer 16

As average prices fall, the real wealth of participants in the economy increases, enhancing their ability to purchase goods and services.

Question 17

What is the interest rate effect?

Answer 17

At lower prices, interest rates decrease, providing people with more disposable income to spend, leading to higher demand.

Question 18

What is the net balance effect?

Answer 18

Lower prices make it cheaper for other countries to purchase exports, increasing demand for exports and improving the trade balance.

Question 19

What are the factors/determinants of Aggregate Demand components?

Answer 19

Factors that cause the aggregate demand curve to shift include consumption, unemployment, and real interest rates.

Question 20

What are the factors of consumer spending?

Answer 20

There are 7 determinants causing consumption to change.

Question 21

How does consumer confidence affect spending?

Answer 21

If consumers are anxious about the economy, they will spend less. If they are confident, they will spend more.

Question 22

What impact does unemployment have on consumer spending?

Answer 22

If there is a threat of being unemployed, there is less freedom to spend.

Question 23

How do real interest rates influence consumer spending?

Answer 23

When interest rates fall, it makes it easier for people to borrow and spend. If they rise, it makes it harder to spend, leading to more incentive to save.

Question 24

What role does wealth play in consumer spending?

Answer 24

Wealth is influenced by property owned. When housing prices rise, people feel wealthier and spend more; the opposite occurs when prices fall.

Question 25

How do personal taxes affect consumer spending?

Answer 25

When income taxes decrease, consumers have more money to spend, increasing consumption. When taxes increase, consumer spending decreases.

Question 26

What effect does household debt have on consumer spending?

Answer 26

Any debt causes a right shift in the short run; if it becomes long-term debt, it shifts to the left.

Question 27

How do consumer expectations influence spending?

Answer 27

If consumers expect prices to increase in the future, they will spend more and save less. If they expect deflation, they will save and spend less.

Question 28

what’s a recessionary gap and inflationary gap

Answer 28

increase in AD is inflationary and decrease is recessionary. decreases causes economy to produce below employment level