Ch36 AD

Question 0

Define aggregate?

Answer 0

The sum or total.

Question 1

How do you work out AD?

Answer 1

C+I+G+(X-M)

Question 2

Define aggregate demand?

Answer 2

The total of all demands or expenditures in the economy at any given price.

Question 3

Define aggregate demand curve?

Answer 3

Shows the relationship between the price level and equilibrium NI. As the price level rises, the equilibrium level of NI falls.

Question 4

Define domestic economy?

Answer 4

The economy of a single country.

Question 5

Define multiplier?

Answer 5

The figure used to multiply a change in autonomous expenditure, such as investment, to find the final change in income.

Question 6

Define multiplier effect?

Answer 6

An increase in investment or any other autonomous expenditure will lead to an even greater increase in income.

Question 7

Why does the AD curve have a negative gradient?

Answer 7

Because the higher the price, the fewer goods and services will be demanded in the economy.

Question 8

What happens if the price level causes a change in interest rates or consumer spending etc?

Answer 8

There is a movement ALONG the AD curve.

Question 9

What happens if any other factor causes a change in interest rates or consumer spending etc?

Answer 9

There is a SHIFT in the AD curve.

Question 10

How does an increase in price level affect interest rates and why?

Answer 10

An increase in price level leads to more borrowing (living cost increases) which leads to more demand for borrowing which leads to the price of borrowing increasing which is an increase in interest rates.

Question 11

Why does an increase in interest rates cause a decrease in consumption?

Answer 11

Because the cost to borrow increases so people are less likely to borrow and therefore less likely to spend.

Question 12

Why does an increase in interest rates cause a decrease in investment?

Answer 12

Because an increase in interest rates leads to a decrease in profit made by firms on new investment projects, so they are less likely to borrow money to invest.

Question 13

If the UK price level goes up, ceteris paribus, what happens to imports and exports for the UK?

Answer 13

More imports due to overseas firms having cheaper prices comparatively, and less exports due to UK products seeming more expensive comparatively.

Question 14

Why does AD fall as prices rise?

Answer 14

Because:
Interest rates increase causing C and I to decrease.
Loss of international competitiveness means more imports and less exports.

Question 15

What four factors can cause a shift in the AD curve?

Answer 15

C, I, G and (X-M)

Question 16

If C, I, G or (X-M) increase, what’s happens to the AD curve?

Answer 16

It shifts outwards (and vice versa).

Question 17

How do you work out the size of the multiplier?

Answer 17

1/(1-MPC) or 1/MPS

Question 18

What does the multiplier apply to?

Answer 18

I, (X-M) and G

Question 19

Why is it difficult for the government to influence NI by ‘playing’ the multiplier?

Answer 19

The multiplier is not instant.
It is difficult to measure the multiplier.
Economists dispute about the size of the multiplier.