Aggregate demand

Question 1

What is the equation for aggregate demand?

Answer 1

AD = C+I+G+(X-M)
C = Consumption
I = Investment
G = Government expenditure
X = Exports
M = Imports

Question 2

Why is the AD curve downward sloping?

Answer 2

Income effect
Balance of trade effect
Lower interest rates

Question 3

What is the real income effect?

Answer 3

As price levels fall, consumers have more purchasing power as their income goes further, so they consume more and GDP rises.

Question 4

What is the balance of trade effect?

Answer 4

A decrease in the price level within an economy, which means that exported goods are cheaper for citizens of foreign countries, whilst imported goods are relatively more expensive. Exports fall and imports rise, GDP rises.

Question 5

Why do lower interest rates make the AD curve downward sloping?

Answer 5

A decrease in the price level usually results in interest rates falling. This decreases the incentive to save and increases the incentive to borrow, so consumption and investment increase, meaning GDP rises.

Question 6

What does a change in the price level cause on the AD curve?

Answer 6

A movement along the curve.

Question 7

What factors influence consumption?

Answer 7

Increase in income
Consumer confidence
Government taxes