Aggregate Demand

Question 1

What is AD

Answer 1

Aggregate demand is the total demand in the economy

Question 2

What are the components of AD

Answer 2

C + I + G + (X-M)
- Consumer spending
- Investment
- Government spending
- Exports minus Imports

Question 3

What a consumers marginal propensity to save

Answer 3

The proportion of each additional pound of household income that is used for saving

Question 4

What influences consumer spending

Answer 4

• Interest rates
• Consumer confidence
• Wealth effects: If housing price go up then house owners feel wealthier and will spend more

Question 5

What’s the difference between gross and net investment

Answer 5

• Gross investment is the amount that a firm invests in a business assets that does not account for loss in value
• Net investment is the actual addition of capital stock of an economy after loss in value has been considered

Question 6

What influences investment

Answer 6

• The rate of economic growth: If growth is high, then firms will have higher profits which they can use to invest
• Business expectations and confidence: If firms expect a high rate of return they will invest more
• Demand for exports: if demand is higher then investment is likely
• Interest rates: If borrowing is cheap then firms are likely to take loans

Question 7

What influences government expenditure

Answer 7

• The Trade cycle: Boom, Recession, Slump or Recovery
• Fiscal policy: Governments use fiscal policy to influence the economy which involves changing government spending and taxation

Question 8

What influences trade balances

Answer 8

• Real income: Higher income, increase in imports
• Exchange rates: A depreciation of the pound makes imports expensive and exports cheaper
• State of world economy: A decline in economic growth in one of the UK’s export markets means there will be a fall in exports
• Degree of protectionism: If UK employed several protectionist measures then trade deficit will reduce