Aggregate Demand

Question 1

What is Aggregate Demand?

Answer 1

the total demand for goods and services within a particular market

Question 2

What are 4 components of AD?

Answer 2

• consumption
• investment
• government spending
• net exports

Question 3

Explain 3 reasons why the AD curve is downward sloping

Answer 3

• The wealth effect – This occurs when there is a fall in price level, giving consumers the perception that they are wealthier as the purchasing power of money increases (assuming wages stay the same). This means that a fall in the price level encourages consumers to spend more, thus increasing Real GDP.
• Increased export revenue – A decrease in the general price level of goods/services within an economy will make exports cheaper (assuming that the price of international goods/services doesn’t decrease also). AS a result of this, lower price levels cause export revenue to increase and therefore Real GDP to increase.
• Lower interest rates – As the price level/inflation decreases interest rates usually fall also. This encourages consumer consumption and investment to increase. Therefore, as these components increase, so does Real GDP

Question 4

What causes the aggregate demand curve to have a contraction?

Answer 4

components of AD fall

Question 5

What causes the aggregate demand curve to have an expansion?

Answer 5

components of AD rise