Aggerate Demand

Question 1

What aggregate demand (AD)

Answer 1

Is the total demand for goods and services produced within the economy over given period of time

Question 2

What is the formula to calculate aggregate demand ( macro )

Answer 2

• AD = C+I+G (X-M) •

C = consumptions spending
I = investment spending
G = government spending

(X-M) = difference between spending on imports and receipts from
Exports

Question 3

Consumption (C) is the biggest component of AD. An increase in C will shift AD to the right . So what are the factors that affect consumption ?

Answer 3

Relative Income : A consumer’s spending will be influenced by what others are earning and spending on past and present.

Wealth : If consumer’s asset wealth increases, spending may be higher.
Aggregate Demand

Expectations/Confidence : If consumers’_expect to earn more income in the future they are likely to increase consumption now

Interest Rates : If interest rates are low, consumer spending increases, as the incentive to save is no longer there.

Question 4

What is investment ( i )

Answer 4

is spending on capital goods such as new factories, other buildings, machinery & vehicles

Question 5

Why is investment important ( use the three C’s )

Answer 5

• Capacity
• Costs
• Competitiveness

• Higher investment should allow businesses to lower their production costs per unit, increase their supply capacity and become more competitive in overseas markets

Question 6

What are the factors the affect the level of capital investment spending

Answer 6

Interest Rates :
• If the interest rates are high, or are increasing then the cost of borrowing goes up .If it gets more expensive to borrow money, businesses make less profit from their projects, so they do fewer of them.

Tax :
• Corporation tax is paid depending on the level of business profits.
If the government reduces the rate of corporation tax there is a greater incentive to invest.

Demand :
• The rate of growth of demand:
Investment tends to be stronger when consumer spending is rising

Availability of finance :
• Businesses are less likely to invest if there is little access to finance

Question 7

What is government spending (G)

Answer 7

spending on state-provided goods and services including public goods and merit goods.which includes health ,education ,law and order

(An increase in government spending will lead to an increase in AD Therefore the curve will shift outward)

Question 8

What is capital and current spending

Answer 8

• Capital spending : includes infrastructure spending like new motorways and roads, hospitals ,schools

• current spending : is pending on state provided goods & services that are provided on a recurrent basis spending

Question 9

What are the factors that cause a rise or fall in government spending

Answer 9

• Fiscal policy :
Government spending may deliberately increase during a recession

• Economic cycle :
In a period of high economic growth tax revenues tend to rise as more people are earning. This gives the government more money to spend on services like the NHs

• Political cycle :
Government may cut spending after an election to try and reduce the budget deficit, but then increase spending shortly before an election

Question 10

What are net exports (x-m)

Answer 10

• Exports are an inflow on demand into circular flow of income and add demand for economy

• Imports are a withdrawal (leakage) from the circular flow of income and spending

( Spending on more imports reduce economic growth )

Question 11

What are some factors that affect Net trade (x-m)

Answer 11

• Exchange Rates : If there is a deprecation of the exchange rate, Exports will become cheaper- Increasing AD

• Non price factors: f the quality of goods is superior demand for exports increases leading to an increase in AD.

• Economic Growth : High economic growth leads to more spending on imports. This will lead to a fall in AD

• Tariffs and Protectionism: Tariffs make exports more expensive. This will reduce AD.