Aggregate demand

Question 1

aggregate demand

Answer 1

total demand for a country’s goods and services at a given price level in a specific time period

Question 2

Aggregate demand equation

Answer 2

C + I + G + (X-M)

Question 3

wealth effect

Answer 3

a decreasing price level increases the purchasing power of income leading to higher consumption and vice versa

Question 4

trade effect

Answer 4

lower prices make exports more competitive and imports less so, increasing net exports and aggregate demand
vice versa

Question 5

interest effect

Answer 5

a decrease in price level allows for lower intrest rates, stimulating higher consumption and investment
vice versa

Question 6

shifts in AD

Answer 6

AD curve shifts due to changes in components of aggregate demand that are all independent of price level

Question 7

consumption

Answer 7

total spending on goods and services by households in the economy
around 66% of AD

Question 8

marginal propensity to consume

Answer 8

the fraction of any increase of income which people plan to spend on the consumption of domestically produced goods and services

Question 9

factors that effect consumption

Answer 9

-level of real disposable income
-interest rates and availability of credit
-consumer confidence
-asset prices
-household incomes

Question 10

factors which effect consumption
level of real disposable income

Answer 10

-real means adjusted for inflation
a cut in marginal rate of income tax or increase in tax free allowance increases the level of real disposable income which will increase the MPC and consumption

Question 11

factors which effect consumption
interest rates

Answer 11

if intrest rates are cut, the cost of borrowing and rate of return on savings decrease, increasing the incentive borrow and NOT save increasing consumption

E.g. cut in interest rates for mortgages means monthly payments are less increasing disposable income and consumption

Question 12

Factors which affect aggregate demand
Consumer confidence

Answer 12

High consumer confidence means consumers have a higher marginal propensity to consume
Job prospects and the level of unemployment in the economy affects this
Of people expect to be promoted and job prospects are strong they’re more likely to spend money increasing the marginal propensity to consume
If unemployment is low and employees will feel secure in their job and feel confident

Question 13

Factors which affect aggregate demand
Availability of credit

Answer 13

If availability of credit is low and it can reduce the impact of borrowing and increase interest rates as banks are less willing to lend

Question 14

Factors which affect aggregate demand
Asset prices

Answer 14

Linked to wealth
The wealthier people feel the higher the marginal propensity to consume
E.G house prices and share prices

Question 15

Factors which affect aggregate demand
Household indebtness

Answer 15

Your families are living in huge debts than individuals are more likely to save their money

Question 16

Saving

Answer 16

Disposable income that is not spent on goods and services in the economy
If savings increase in the economy by default, there will be less consumption taken place decreasing aggregate demand

Question 17

Factors that affect saving

Answer 17

-level of real disposable income
-Interest rates
-Consumer confidence
-Range and trustworthiness of financial institutions
-Tax incentives
-age structure of a population

Question 18

Factors which affect savings
The level of real disposable income

Answer 18

If incomes rise, we don’t spend all of our money so consumptions and savings will rise

Question 19

Factors which affect savings
Interest rates

Answer 19

High interest rate and encourage more saving as the rate of return from savings increased leading to high propensity to save

Question 20

Factors that affect saving
Consumer confidence

Answer 20

If consumer confidence is low(e.g people fear or recession or losing their jobs) people are more likely to save in preparation

Question 21

Factors that affect saving
Range and trustworthiness of financial institutions

Answer 21

More important in developing nations where banks are often corrupt and non-trustworthy which reduces the incentive to save
Education and developing countries can also be a barrier as individuals just don’t know the benefits of savings

Question 22

Factors which affect saving
Tax incentives

Answer 22

ISAs
The government policies to encourage more savings and ISA is an individual savings account where you can have savings and you can have and earn savings which are tax-free up to a certain level

Question 23

Factors which affect saving
Age structure of the population

Answer 23

Middle-aged people are more likely to save money for their children and for their retirement
Younger and older people are more likely to spend

Question 24

Investment

Answer 24

When firms spend money on capital goods to increase their productive capacity

Question 25

Factors which affect investment

Answer 25

-interest rates -Business confidence -Corporation tax -Spare capacity -Level of competition -Price of capital firms will finance investment in two main ways, either by borrowing money or by investing retained profits they have

Question 26

factors which effect interest rates investment

Answer 26

if interest rates are low cost of borrowing is low, giving firms a greater incentive to borrow and invest the marginal propensity to invest will increase and vice versa

Question 27

factors which effect interest rates hurdle

Answer 27

the required rate of return that firms need for investments projects to go ahead lower interest rates means a lower hurdle

Question 28

factors which effect interest rates business confidence

Answer 28

determined by two expectations by firms: -expectation of profit and of future demand if the expectation of profit and demand is high, the business is more likely to invest

Question 29

factors which effect interest rates corporation tax

Answer 29

the lower the corporation tax the higher the retained profit leading to a greater potential for business to invest

Question 30

factors which effect interest rates spare capacity

Answer 30

if there is a lot of spare capacity there is no need to invest to buy more capital machinery, the greater the spare capacity to lower the less the MPI, decreasing investment and aggregate demand

Question 31

factors which effect interest rates level of competition

Answer 31

if competition is strong, with lots of competitors improving their technology or spending money on capital machinery and R+D, likely the business would respond by spending more money on investment

Question 32

accelerator effect

Answer 32

when there is an increase in the rate of real GDP in the economy which then encourages further investment which will then increase the rate of real GDP which inncreases investment etc.

Question 33

capital spending

Answer 33

spending on infrastructure projects e.g. building of new hospitals/ schools/ roads and bridges all counts as infrastructure spending which is capital spending -injection, would shift AD right

Question 34

current spending

Answer 34

spending on the maintenance of key public services e.g. maintenance of NHS / state school aldo the payments of public sector wages -injection, would shift AD right

Question 35

welfare spending

Answer 35

biggest chunk of gov spending spending on benefits and pensions in the UK benefits like unemployment/ child support and disability benefits etc. -injection, would shift AD right

Question 36

debt interest payments (type of gov spending)

Answer 36

any time govs take on debt falls under debt interest

Question 37

budget deficit

Answer 37

when gov spending exceeds gov revenue from taxation in a fiscal year (every april)

Question 38

budget surplus

Answer 38

where gov spending is less then gov revenue in a fiscal year

Question 39

national debt

Answer 39

total stock of debt over time accumulation of budget deficits

Question 40

factors that effect net exports

Answer 40

-real disposable incomes made abroad -real disposable incomes made at home -strong or weak exchange rates -protectionism home and abroad -relative inflation rates home and abroad