Aggregate Demand

Question 1

AD Equation

Answer 1

AD = C + I + G + (X-M)
AD = GDP

Question 2

Components of AD

Answer 2

• Consumption
• Investment
• Government Spending
• Exports
• Imports

Question 3

Consumption Definition

Answer 3

Spending on goods and services.

Question 4

Investment Definition

Answer 4

• Gross Domestic Fixed Capital Formation
• Spending on assets used over a number of years to produce goods and services.
• Includes spending on capital goods (machinery and vehicles) and on working capital (stocks of finished goods and work in progress).
• Net investment includes depreciation. Gross investment doesn’t.

Question 5

Government Spending Definition

Answer 5

Spending on publicly provided goods and services.

Question 6

Exports Definition

Answer 6

UK output sold abroad.

Question 7

Imports Definition

Answer 7

Foreign output purchased by the UK.

Question 8

Proportions of AD

Answer 8

Consumption - 61%
Government Spending - 25%
Investment - 15%
Net Exports - -1%

Question 9

Axes on AD Curve

Answer 9

Y Axis - Price Level
X Axis - Real National Output

Question 10

Price Level Definition

Answer 10

The average of prices for all goods and services in an economy i.e. inflation.

Question 11

Real National Output Definition

Answer 11

The output of the economy taking into account inflation.

Question 12

Real Balance Effect Definition

Answer 12

As P level rises, the real value of incomes falls = consumers, government, business less able to buy what they want or need.