Aggregte Demand

Question 1

Aggregate Demand

Answer 1

Total planned expenditure within an economy over a SPOT

Question 2

Components of AD

Answer 2

Consumption
Investment
Government spending
Exports
Imports

Question 3

AD equation

Answer 3

C+I+G+(X-M)

Question 4

Trade Surplus

Answer 4

When exports > imports this increases AD

Question 5

Trade Deficit

Answer 5

When imports > exports this decrease AD

Question 6

AD and Price have an Inverse relationship because (3)

Answer 6

Real balance effect
Balance of trade
Interest rate effect

Question 7

CPI

Answer 7

Stands for consumer price index and measures inflation

Question 8

Real balance effect

Answer 8

As the price level rises, real income falls and consumers are able to buy less

Question 9

Balance of Trade

Answer 9

A persistent price rise of a countries goods will make foreign good cheaper, increasing imports and decreasing exports

Question 10

Interest rate effect

Answer 10

• Price rises cause inflation
• This increases demand for money •Interest rates will rise and have a negative effect on the economic growth
•People will save more and spend less therefore AD falls

Question 11

What causes a right shift in AD (5)

Answer 11

Depreciation of exchange rate
Tax Cuts
Increase in house prices
Expansion of supply of credit
Lower interest rates

Question 12

What causes a left shift in AD (4)

Answer 12

Fall in exports
Cut in government spending
Higher interest rates
Decline in household wealth

Question 13

External shocks

Answer 13

Many unexpected events cause changes in demand, output and employment

Question 14

External shock examples (5)

Answer 14

• Big exchange rate change
• Recession of a trading partner
• Slump in housing market
• Credit crunch
• Change in government taxation and spending

Question 15

Consumption

Answer 15

All household spending on G/S

Question 16

Marginal Propensity to consume

Answer 16

The change in consumer spending following a change in income

Question 17

Marginal Propensity to consume example

Answer 17

Disposable income: £2000
Spending: £1500
Saving: £500

MPC: 1500/2000=0.75
MPS: 500/2000=0.25

Question 18

MPC + MPS always =

Answer 18

1

Question 19

Factors affecting consumer spending (6) 🇳🇬

Answer 19

Tax
Welfare
Interest rates
Confidence
Economy

Job security

Question 20

Factors affecting consumer confidence (4)

Answer 20

Economic growth
Household debts
Unemployment
House prices

Question 21

Household saving

Answer 21

Disposable income that is not spent, spending is postponed to a later date

Question 22

Macro importance of saving (3)

Answer 22

Business survival
Funding investment
Buffer for consumers

Question 23

Investment

Answer 23

Spending on Capital goods

Question 24

Examples of investment (5)

Answer 24

Factories
Buildings
Machinery
Technology
Vehicles

Question 25

Key factors determining business investment (4)

Answer 25

Actual and expected demand
Expected profits and business taxes
Interest rates + availability of finance
Business confidence

Question 26

Macro advantages of investment and evaluation (3)

Answer 26

• Injections boost AD but some investment could be imported, this is a leakage
• New capital can boost productivity and increase supply but there can be a time lag
• Creates extra demand in investment and boosts GDP, capital could lead to short term unemployment

Question 27

The accelerator theory

Answer 27

A percentage increase in real GDP will lead to an even higher percentage increase in investment

Question 28

Government spending is effected by (4)

Answer 28

Developments in the economy
The political priorities of the Gov
National debt
Geo-political factors

Question 29

Consequence of National debt

Answer 29

Crowding out

Question 30

Exports

Answer 30

G/S sold to other countries, its an injection into a nations CFOI

Question 31

Factors affecting demand for exports (4)

Answer 31

• Relative price of exports
• The exchange rate (SPICED)
• Non-price demand factors (brands and quality)
• Strength of the economy in key export markets

Question 32

Imports

Answer 32

G/S bought from other countries they are a withdrawal from a nations CFOI

Question 33

Net Trade Balance

Answer 33

Measures the value of exported G/S minus the value of imported products

Question 34

Hot Money Flows

Answer 34

Higher interest rates in the UK provide incentives for foreign investors to move money into UK banks

Question 35

Increases in interest rates (foreign investment)

Answer 35

UK becomes more attractive location for investors as they can seek higher returns. Foreign investors purchase pounds to invest in UK banks, demand for the pound rises raising the price of the pound

Question 36

Decrease in interest rates (foreign investment)

Answer 36

UK becomes less attractive for foreign investors as there are lower rates of return. Foreign investors sell the pound to purchase other currencies, supply of the pound increases and this decrease the price of the pound.

Question 37

Strong Pound

Answer 37

Strong
Pound
Imports
Cheaper
Exports
Dearer

Question 38

Weak Pound

Answer 38

Weak
Pound
Imports
Dearer
Exports
Cheaper

Question 39

Multiplier effect

Answer 39

An increase in a component of AD leads to a greater than proportionate increase in GDP.
Someone’s spending is someone’s income, they spend money and a ripple effect occurs.

Question 40

Determinant of the size of the Multiplier effect

Answer 40

Marginal Propensity to Withdraw (MPW)

Question 41

Equation for multiplier effect

Answer 41

Multiplier
————-
MPW