Aggregate demand and shifts in AD curve (C)

Question 1

Define aggregate demand

Answer 1

• total desired spending
• on domestically produced products
• all sectors (H, G, F, foreign)
• at diff price lvls
• in a given time period

Question 2

AD curve

Answer 2

• shows relationship btwn total amt of output that will be demanded at each price lvl
• downward sloping
• change in gpl causes movement along curve

Question 3

Why is the AD curve downward sloping?

Answer 3

1. Wealth/Real balance effect
2. Substitution effect
3. Interest Rate affect

Question 4

Wealth/Real balance affect

Answer 4

1. price rise
2. assume wages lag behind price increase
3. real value of household’s assets (cash, bank deposits), real incomes fall
4. purchasing power decrease
5. save more to restore wealth, C falls
6. AD decrease, leftward shift
7. vice versa

Question 5

Substitution effect

Answer 5

1. GPL of country rise
2. exports become more expensive and export revenue falls
3. imports relatively cheaper, expenditure increases
4. net exports decrease, AD fall
5. vice versa

Question 6

Interest Rate effect (GPL rise)

Answer 6

1. GPL rise
2. real value of money drops, firms and households borrow more to finance expenditure
3. interest rate rises
4. consumption and investment falls, Ad falls

Question 7

Interest rate effect (GPL falls)

Answer 7

1. GPL falls
2. real value of money balances increase
3. increased purchasing power and ability to loan money out (by buying bonds and stocks)
4. cause downward pressure on interest rates, cost of borrowing decrease
5. C and I increase, rightward shift of AD curve

Question 8

Shifts in AD curve (C)

Answer 8

a. Taxation
b. Consumers expectations of the future
c. Size of one’s wealth/accumulated past savings, present debt position
d. Cost and availability of credit (interest rates)
e. Consumer confidence

Question 9

Taxation (C)

Answer 9

1. income tax increase
2. disposable income decrease
3. consumption decrease
4. vice versa

Question 10

Consumers’ expectation of future (C)

Answer 10

• concerning future prices and money incomes
• affects spending or saving
• spend more on big ticket items e.g TV if prices expected to rise in future
• e.g SG GST rise from 7% to 9% `

Question 11

Size of one’s wealth (C)

Answer 11

1. wealth increase e.g booming property market
2. appreciation and value of property increase
3. increased wealth of ppl who invest in property
4. increase C, AD increase

Question 12

Present debt position (C)

Answer 12

1. lvl of household debt increase
2. more household income channelled to repay debts
3. lesser household income for C
4. C drop, AD falls

Question 13

Accumulated past savings (C)

Answer 13

1. committed to instalment payments on previous payments/ little accumulated past savings
2. reduce current C to reduce indebtedness

Question 14

Cost and availability of credit (interest rates) (C)

Answer 14

1. many consumer durables bought on credit
2. rate of interest decrease, easier to get credit
3. cost of borrowing drops
4. increase C, AD rightward shift

Question 15

Consumer confidence (C)

Answer 15

1. measure of how optimistic consumers are abt future income and future of economy
2. expect income to increase/ optimistic abt future of economy
3. C increase, AD rise
4. vice versa (fear of cuts in wages, unemployment, worsening economic conditions)
5. gov arnd world measure consumer confidence via surveys to predict lvl of consumer spending