Agregate Demand

Question 1

Meaning of aggregate demand

Answer 1

Aggregate demand is the total spending on goods and services in a period of time at a given level of price

Question 2

Components of AD

Answer 2

1. Consumption or consumer expenditure (C)
2. Investments (I)
   - defined as the addition of capital stock to the economy
3. Government expenditure (G)
4. Net Export (X-M)

Question 3

The wealth effect of AD graph (VICE VERSA)

Answer 3

If APL decreases, items become cheaper, allowing people to have higher purchasing power , consumption increases

VICE VERSA

Question 4

Interest rate effect from AD graph(VICE VERSA)

Answer 4

If APL decreases , less money are needed to effectuate a transaction.

Assuming supply of money fixed, but demand for money drops, supply of money is in surplus

Thus, interest rates drops.

Consequently. Consumption and investment rise

VICE VERSA

Question 5

International trade effect from AD graph (VICE VERSA)

Answer 5

If the APL drops, exports become more competitive abroad since our prices are cheaper , and import becomes more expensive.

Thus, net export increases

Dead for export increase, real output rises

Question 6

Changes in components will change the aggregate demand

What causes change in consumption?

Answer 6

1. Changes in personal income tax
   - PIT increase
   - Disposable income fall
   - Consumption fall
   - Aggregate demand fall
2. Changes in Interest Rate
   - Interest rate increase
   - Borrowing drops / Ssaving rise
   - Consumption drops
   - Aggregate demand drops
3. Changes in consumer confidence
4. Changes in wealth
5. Household indebtness

Question 7

What causes change in investment ?

Answer 7

1. Interest rate
   - IR increase
   - S increase
   - I drop
   - AD drop
2. Technological change
3. Expectation business confidence
4. Business taxes
   - taxes rise
   - profit after tax drops
   - Investment drop
   - AD drops

Question 8

What causes change in government spending ?

Answer 8

Government expenditure is dependent on state budget, the topeng of fiskal policy that apolisis

When government adopt contractionary fiscal policy, the level of government spending decreases and AD falls

When the government adopts an expansionary fiscal policy , the level of government spending increases and AD rises

Question 9

What causes changes in net export

Export VICE VERSA

Answer 9

1. Foreign Income
   - FI rise
   - Demand for Export rise
   - Export rises
   - Aggregate demand rises
2. Exchange rate
   - ER Rise
   - Price of Export rises
   A) Export for Demand inelastic rise
   B) Export for Demand elastic drop
3. Changes in countries trade policies ( tariff )
4. Relative inflation rates
   - FIR greater
   - Price of Exports drops
   - Export rise
   AD rise

Question 10

Import (VICE VERSA)

Answer 10

1. National Income
2. Exchange rate
   - ER Rise
   - Price of Export drops
   A) Import value for inelastic demand drops
   - NX rise
   - AD rise
   B) Import value for elastic demand rise
   - NX drop
   - AD drop
3. Trade Policies (import tariffs)
4. Relative inflation rate
   - FIR greater
   - Import Price rise
   - Import drops
   - NX rise
   AD Rise