Aggregate Demand

Question 0

What is aggregate demand made up of?

Answer 0

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

AD = Consumer spending + Investment by business’ + Government spending + Difference between exports and imports

Question 1

If AD increases, what happens to economic growth?

Answer 1

It increases.

Question 2

What are consumer durables?

Answer 2

Goods used more than once (i.e. a car)

Question 3

What are consumer non-durables?

Answer 3

Goods used once (i.e. food)

Question 4

What affects consumption?

Answer 4

• Price of good
• Price of substitute good
• Inflation
• Income tax
• Amount of disposable income
• Reputation of good
• Wealth
• Availability of credit

Question 5

What did Keynes argue was the main determinant of consumption?

Answer 5

Disposable income.

Question 6

What is disposable income?

Answer 6

Money left over after taxes have been paid.

Question 7

What is discretionary income?

Answer 7

Money left after taxes and bills have been paid.

Question 8

What is the consumption function?

Answer 8

Our total income always adds up to 1.

1 = MPC + MPS

MPC = Marginal propensity to consume
MPS = Marginal propensity to save

Question 9

Define the 2 types of wealth.

Answer 9

Physical wealth = Possessions/collectibles

Monetary wealth = Amount of money you have

Question 10

What is the wealth effect?

Answer 10

The greater a consumer’s wealth, the more they are likely to spend.

Question 11

What is the government’s main source of income?

Answer 11

Taxation