Aggregate Demand

Question 1

what is consumption

Answer 1

total spending by households on goods and services

Question 2

what percentage of AD is consumption

Answer 2

60%

Question 3

what is the relationship between savings and consumption

Answer 3

inverse

Question 4

how does income influence consumption

Answer 4

If disposable income increases then consumption will rise

Question 5

what is disposable income

Answer 5

income after tax

Question 6

how do interest rates influence consumption

Answer 6

higher rates lead to more saving and less consumption

Question 7

how does consumer confidence influence consumption

Answer 7

When consumers are more financially confident in economy they will spend more.

Question 8

how does the wealth effect influence consumption

Answer 8

A rise in wealth which is value of peoples assets leads to increase in confidence and spending

Question 9

How does tax influence consumption

Answer 9

increase in tax causes people to have less disposable income or spending to cost more so consumption will fall

Question 10

how does unemployment affect consumption

Answer 10

rise in unemployment will cause people to have less disposable income so consumption would drop

Question 11

how does inflation influence consumption

Answer 11

short run expectation for inflation causes consumption to increase.

Question 12

what percentage of AD is investment

Answer 12

15%

Question 13

what is the difference between gross and net investment

Answer 13

gross is all investment but net is only that which increases productive capacity

Question 14

what is capital investment

Answer 14

spending on capital goods like labour or new buildings and equipment

Question 15

how does risk affect investment

Answer 15

high risk in economic instability or low confidence leads to low investment

Question 16

how do government incentives influence investment

Answer 16

increase in subsidies or reduction in corp tax may result in increases investment

Question 17

how do interest rates and credit availability affect investment

Answer 17

low rates of interest and high CA make borrowing for firms easier so investment will increase

Question 18

how do technological advancements influence investment

Answer 18

new technology increases investment as firms aim to stay up to date with tech

Question 19

accelerator theory

Answer 19

investment increases when demand or income increases

Question 20

animal spirits

Answer 20

Keynes idea that investments aren’t always rational as they can be based on emotion and instinct

Question 21

how does high demand for exports and high growth lead to increase in investment

Answer 21

provide supernormal profits for businesses which is used as retained profit and reinvested

Question 22

what percentage of aggregate demand is gov spending

Answer 22

30%

Question 23

what is not included in gov spending in AD

Answer 23

benefits and pensions

Question 24

how does a recession affect gov spending

Answer 24

government will overspend causing a deficit to stimulate growth and increase AD

Question 25

how does a boom affect gov spending

Answer 25

government will cut spending to slow economic growth and reduce AD

Question 26

why is a long term surplus bad

Answer 26

gov may be harming economic growth by not spending or high taxes

Question 27

why is a long term deficit bad

Answer 27

large gov debt

Question 28

what percentage of AD does net exports hold

Answer 28

-5%

Question 29

how does a strong exchange rate influence net exports in the long run

Answer 29

imports cheap exports dear so demand will rise for imports but fall for exports which worsens net exports

Question 30

how does a strong exchange rate influence net exports in the short run

Answer 30

demand may not change much as it is inelastic so net exports will improve as value has increased but demand hasn’t decreased

Question 31

how does real income affect net exports

Answer 31

higher a country’s real income the more it imports

Question 32

how does the state of the world economy affect net exports

Answer 32

if USA exports lots to Canada but Canada falls into recession then USA exports will decrease

Question 33

how does protectionism affect net exports

Answer 33

in short run tariffs help to increase exports and decrease imports, but in the long run there will be retaliation

Question 34

How do non price factors affect net exports

Answer 34

higher quality of goods will increase exports as they demand a higher price