Aggregate demand

Question 1

Components Share of Aggregate Demand:

Answer 1

Consumption = 60%

Investment = 14%

Government Spending = 25%

Exports minus Imports = 1%

Question 2

Net investment

Answer 2

Net investment = Gross investment - Depreciation

Question 3

Contraction in AD

Answer 3

An increase in the price level leads to a decrease in real GDP.

Question 4

Extension in AD

Answer 4

A decrease in the price level leads to an increase in real GDP.

Question 5

Multiplier Effect

Answer 5

The multiplier effect is when an initial increase in an injection leads to a much bigger, overall effect on the economy.

Question 6

Disposable Income

Answer 6

Income minus taxes.

Question 7

Multiplier Ratio

Question 8

Marginal Propensity to Save

Answer 8

The proportion of additional income that is saved.

Question 9

Marginal Propensity to Import

Answer 9

The proportion of additional income that is spent on imports.

Question 10

Marginal Propensity to Tax

Answer 10

The proportion of additional income that is taxed.

Question 11

Marginal Propensity to Consume

Answer 11

The proportion of additional income that is spent on goods in the economy (consumed).

Question 12

Marginal Propensity to Withdraw

Answer 12

The proportion of additional income that is withdrawn from the economy (saved, taxed or spent on imports).

Question 13

Downward Multiplier Effect

Answer 13

The downward multiplier effect is where an initial increase in withdrawals leads to a larger decrease in aggregate demand.

Question 14

Animal Spirits

Answer 14

High animal spirits mean that investor confidence is high.

Question 15

Wealth Effect

Answer 15

When changes in consumers’ wealth affect their confidence and spending.

Question 16

Savings Ratio

Answer 16

The savings ratio gives the percentage of a consumer’s disposable income that is saved.

Savings ratio = (Total Savings/Disposable Income) x 100