Aggregate Demand

Question 1

What is Aggregate Demand

Answer 1

Total expenditure on goods and services produced within a country in a given time period

Question 2

Components of AD

Answer 2

C+I+G+(X-M)

C = Consumption
I = Investment
G = Government Spending
X-M = Net Trade (Exports - Imports)

Question 3

Consequences of a Fall in AD

Answer 3

Fall in Net Exports

Cut in Real Government Spending

Higher Interest Rates / Fall in Supply of Credit from the banking system

Decline in Household Wealth + Confidence

Question 4

Consequences of an Increase in AD

Answer 4

Depreciation in the value of the exchange rate

Cuts in the rate of direct and indirect taxes

Increase in house and share prices

Expansion of supply in credit / Lower interest rates

Question 5

What will result in an increase in AD

Answer 5

A fall in interest rates - consumption and investment

A fall in exchange rate - boost exports and reduce imports

Lowering income tax - raise consumption

Question 6

What does a rise in AD lead to

Answer 6

Increase in both real output and price level in the short run

Question 7

What does a fall in AD lead to

Answer 7

Fall in real output and a fall in the price level