Aggregate Demand

Question 1

AD formula

Answer 1

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

Question 2

What happens if any of the factors in the AD formula are stimulated?

Answer 2

Will cause a shift in AD (inwards or outwards depending on how the factor is stimulated e.g. Increase or decrease

Question 3

Why is the AD curve that shape?

Answer 3

As price rises (inflation) there is a fall in real income and consumption, therefore reducing demand.

Question 4

What causes an outward shift?

Answer 4

• depreciation of the exchange rate
• cuts in taxes
• increase in house prices (price goes up with demand)

Question 5

What causes an inward shift?

Answer 5

• fall in exports
• decline in household wealth
• higher interest rates
• cut in gov spending

Question 6

What factors affect consumer spending?

Answer 6

• real disposable income
• employment and job security
• household wealth
• optimism/ pessimism- economic uncertainty leads to a fall in spending
• interest rates

Question 7

What is consumer confidence?

Answer 7

Consumer confidence measures a range of consumer attitudes, including forward expectations of the general economic situation and households financial positions and views in making major household purchases.

Question 8

What is saving?

Answer 8

When people decide to postpone their consumption until a future time

Question 9

What is saving ratio? Definition

Answer 9

The % of disposable income saved rather than spent e.g. If a person has annual income of £25000 and saves £2500 the savings ratio is 10%.

Question 10

Whats the equation for savings ratio?

Answer 10

Saving / disposable annual income x 100