Aggregate Demand

Question 1

What is the effect of interest rate on investment spending?

Answer 1

Higher interest rates _ lower levels of investment;

Lower interest rates _ higher levels of investment.

Question 2

Define the “consumption function”.

Answer 2

The relationship between consumption spending and disposable income.

Question 3

What are the factors that influence investment spending?

Answer 3

Interest rate;
Demographics;
Consumer confidence;
Consumer income and wealth;
Current vacancy rates;
Level of capacity utilization;
Technological advances;
Current and expected sales levels.

Question 4

What are the factors that determine the level of imports?

Answer 4

Relative levels of income and wealth;
Relative values of currencies;
Relative price levels;
Import and export restrictions and tariffs;
Relative inflationary rates.

Question 5

Define “average propensity to consume” and “average propensity to save”.

Answer 5

The average propensity to consume (APC) is the fraction of income spent. It is computed by dividing consumption by income
The average propensity to save (APS), also known as the savings ratio, is the proportion of income which is saved
The complement (1 minus the APS) is the average propensity to consume (APC).

Question 6

Define “marginal propensity to consume” and “marginal propensity to save”.

Answer 6

MPC = Change in consumption as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be spent).
MPS = Change in savings as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be saved).
MPC + MPS = 1 (i.e., the change in disposable income).

Question 7

Define “discretionary fiscal policy”.

Answer 7

Intentional changes by the government in its tax receipts and/or spending to increase or decrease aggregate demand. (e.g., to close a recessionary gap - increase demand;-to close an inflationary gap - reduce demand.)

Question 8

Define “aggregate demand”.

Answer 8

Total spending of individuals, businesses, governmental entities, and net foreign spending on goods and services at different prices at the macroeconomic (economy) level.

Question 9

List the significant factors that cause a negatively-sloped demand curve.

Answer 9

Interest rate factor;
Wealth-level factor;
Foreign purchasing power factor.

Question 10

Give at least three examples of investment spending.

Answer 10

Residential construction;
Nonresidential construction;
Business durable equipment;
Business inventory.