Aggregate Deman

Question 1

Define “aggregate demand”.

Answer 1

Total spending of individuals, businesses, governmental entities, and net foreign spending on goods and services at different prices at the macroeconomic (economy) level.

Question 2

Define “average propensity to consume” and “average propensity to save”.

Answer 2

1. APC = Percent of disposable income spent on consumption goods.
2. APS = Percent of disposable income saved
3. APS + APS = 1 (i.e., Disposable Income)

Question 3

What is the effect of interest rate on investment spending?

Answer 3

1. Higher interest rates_lower levels of investment

2. Lower interest rates_higher levels of investment

Question 4

Define “marginal propensity to consume” and “marginal propensity to save”.

Answer 4

1. MPC = Change in consumption as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be spent).
2. MPS = Change in savings as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be saved).
3. MPC + MPS = 1 (i.e., the change in disposable income).

Question 5

Define “discretionary fiscal policy”.

Answer 5

Intentional changes by the government in its tax receipts and/or spending to increase or decrease aggregate demand. (e.g., to close a recessionary gap - increase demand; to close an inflationary gap - reduce demand).

Question 6

What are the factors that determine the level of imports?

Answer 6

1. Relative levels of income and wealth
2. Relative values of currencies
3. Relative prices levels
4. Import and export restrictions and tariffs
5. Relative inflationary rates

Question 7

Define “consumption function”.

Answer 7

The relationship between consumption spending and disposable income.

Question 8

What are the factors that influences investment spending?

Answer 8

1. Interest rate
2. Demographics
3. Consumer confidence
4. Consumer income and wealth
5. Current vacancy rates
6. Level of capacity utilization
7. Technological advances
8. Current and expected sales levels

Question 9

Give at least three examples of investment spending.

Answer 9

1. Residential construction
2. Nonresidential construction
3. Business durable equipment
4. Business inventory

Question 10

List the significant factors that cause a negatively-sloped demand curve.

Answer 10

1. Interest rate factor
2. Wealth level factor
3. Foreign purchasing power factor