Aggregate Demand (AD)

Question 1

Aggregate Demand

Answer 1

The total expenditure on goods and services demanded in a period of time at a given price

Question 2

Components of AD

Answer 2

Consumption (biggest part 60%)
Investment
Government spending
Net exports

Question 3

Aggregate demand equation

Answer 3

C + I + G + (X-M)

Question 4

AD curve

Answer 4

Shows relationship between AD and the general price level

Question 5

Movements along AD curve

Answer 5

Expansion (right): caused by a fall in the general price level
Contraction (left): caused by a rise in the general price level

Question 6

Shifts of AD curve

Answer 6

Causes by factors independent of changes in the general price level
Outward: AD has increased (there is a higher level of demand at each price)
Inward: AD has fallen

Question 7

Causes of shifts in the level of AD

Answer 7

• ## Changes in real incomes and employment

Question 8

Disposable income

Answer 8

Amount of money households have available for spending or saving
= Original income before gov intervention + Cash benefits - direct and local Taxes

Question 9

Disposable income consumption relationship

Answer 9

The higher households disposable income, the higher consumer spending
A decrease in disposable income would reduce consumer spending

Question 10

Savings and consumption relationship

Answer 10

How much an increase in income affects consumption i.e. marginal propensity to consume (MPC)

Question 11

Marginal Propensity to Consume

Answer 11

Poorer people tend to have a higher MPC as they are likely to spend much more of their increase in income whilst richer people are more likely to save it. change in consumption / change in income