Aggregate Demand

Question 1

What’s the balance of payments?

Answer 1

The method by which countries measure all of the international monetary transactions within a certain period. It includes the current account and the capital account

Question 2

What does the current account measure?

Answer 2

Trade in goods/services (trade balance)
Income
Transfers

Question 3

What are the demand side causes of a current account deficit?

Answer 3

Strong domestic growth
Recessions overseas
Strong exchange rate

Question 4

What are the supply side causes of a current account deficit?

Answer 4

Low investment
Low productivity
High relative inflation
High unit labour costs
Poor quality of products
Depletion of resources

Question 5

What are the evaluations of a current account deficit?

Answer 5

Depends on the size of the deficit
Depends on the cause of the deficit

Question 6

What are exchange rates?

Answer 6

The price of one currency in terms of another

Question 7

What are the reasons for demand side exchange rate changes?

Answer 7

Increase in relative interest rates
Speculators anticipating a rise in x
Increase in foreign direct investment
Rise in incomes abroad
Increase in competitiveness

Question 8

What are the reasons for supply side exchange rate changes?

Answer 8

Decrease in interest rates
Speculators anticipating a fall in x
Firms moving away from country x
Increase in incomes domestically

Question 9

What are the impacts of a strong currency?

Answer 9

SPICED
Increased demand for and expenditure on imports
Decreased demand for and revenue from exports
Left shift for AD

Question 10

What are the impacts of a weak currency?

Answer 10

WIDEC
Decreased demand for and expenditure on imports
Increased demand for and revenue from exports
Right shift for AD

Question 11

What are the evaluations of exchange rate changes?

Answer 11

Depends on the PED for exports and imports
Depends on the size of the change
Depends on whether there’s restrictions on trade
Offset by other factors
Depends on incomes abroad

Question 12

What’s aggregate demand?

Answer 12

The total demand for a country’s goods/services at a certain price level at a certain time

Question 13

What’s the wealth effect

Answer 13

As price level decreases, purchasing power increases

Question 14

What’s the trade effect?

Answer 14

As price level decreases, exports become more competitive and imports become less competitive

Question 15

What’s the interest effect?

Answer 15

As price level decreases, interest rates can be kept lower as banks aim to meet the inflation target

Question 16

What’s the marginal propensity to consume (MPC)?

Answer 16

The willingness of a household to spend any extra income that they earn

Question 17

What are the determinants of consumption.

Answer 17

The multiplier effect
1. Level of real disposable income
2. Interest rates
3. Consumer confidence
4. Asset prices
5. Household indebtedness

Question 18

What are the determinants of saving?

Answer 18

1. Level of real disposable income
2. Interest rates
3. Level of consumer confidence
4. Trust of financial institutions
5. Tax incentives
6. Age structure of population

Question 19

What are the determinants of investment

Answer 19

Accelerator effect
1. Interest rates
2. Business confidence
3. Corporation tax
4. Spare capacity
5. Level of competition
6. Price of capital

Question 20

What are the determinants of government spending?

Answer 20

1. Current spending
2. Capital spending
3. Welfare spending
4. Debt interest payments

Question 21

What are the determinants of net exports?

Answer 21

1. Real disposable income earned abroad
2. Real disposable income earned at home
3. Strong or weak exchange rates
4. Protectionism at home or abroad
5. Relative inflation levels at home

Question 22

What’s aggregate supply?

Answer 22

The supply of goods and services by firms at each and every price level.

Question 23

What are the costs of production?

Answer 23

Wages
Raw materials / commodity prices
Oil prices
Business taxes
Import prices

Question 24

What’s a negative output gap?

Answer 24

Where actual output is less than potential output

Question 25

What’s a positive output gap?

Answer 25

Where actual output is greater than potential output.