Aggregate Demand - Characteristics

Question 1

The formula for aggregate demand

Answer 1

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

Question 2

What is consumption

Answer 2

The total spending by households on goods and services

Consumption is the largest component of AD in the UK and most other similar economies, at around 60%

Question 3

What is investment

Answer 3

This is expenditure by firms on goods that have a delayed consumption
(Around 15% of AD in the UK)

Question 4

What is government spending

Answer 4

In the UK the government’s largest expenditure go towards health, education, pensions and welfare. In total, government spending comprises around 25% of AD

Question 5

X is _________, and M is ____________

Answer 5

X = Exports
M = Imports

Question 6

( X - M) is referred to as net _________

Answer 6

Net exports

In the UK this is traditionally negative and is the smallest component of AD

Question 7

The AD curve is plotted with the price level on the __-axis and real GDP on the __-axis

Answer 7

Y-axis

X-axis

Question 8

Reasons why the AD curve slopes downwards

Answer 8

Real balance effect - at higher price levels people can’t afford to buy as many goods (loss of purchasing power)

International competitiveness - if prices are higher, an economy will find it harder to export their goods, but easier to purchase

Interest rate - At higher price levels, interest rates tend to rise to offset the price increases. Higher interest rates reduce investment and consumption, thereby reducing AD

Question 9

Movements along the AD curve occur when the _______ ________ changes.
Shifts in the AD curve are a result of changes in the value of the ____________ of AD.

Answer 9

Price level

Components