Aggregate Demand - Macro

Question 1

Aggregate Demand definition

Answer 1

Total spending in an economy; sum of all market demand curves;

Consumption, investment, government, net exports

Question 2

Consumption spending

Answer 2

By individuals on goods and services (not housing - investment) - 70% spending in the US determined by PDI

Consumption function - relationship between disposable income and consumption spending (PDI) and (CS)

CS > PDI = Borrowing

CS

Question 3

Marginal Propensity to Consume (MPC)

Answer 3

Change in consumption spending as a percent of the change in disposable income; $1 additional disposable spent 90c = 90%

MPC=MPS (save) reciprocal

Question 4

Investment Spending

Answer 4

Spending on capital items; PPE, residential - 15% spending in US;

Interest rate, demographics, consumer confidence, consumer income and wealth, etc…

Overtime interest rates become the most significant factor

Question 5

Government Spending

Answer 5

Purchase of goods and services by all levels of gov. Excludes transfer payments (social security) - spending typically impacts taxes

Use of government spending to impact aggregate demand = discretionary fiscal policy

Question 6

Imports and Exports

Answer 6

Net exports = exports - imports

Exports>imports = increases in aggregate demand