Characteristics of Aggregate Demand

Question 1

Which way does the Aggregate Demand curve slope?

Answer 1

Downwards

Question 2

What does the Aggregate Demand curve show?

Answer 2

The relationship between the price level and equilibrium output in the economy

Question 3

What does a movement along the Aggregate Demand curve show?

Answer 3

• Shows how real output will change if there is a change in price level

Question 4

How is the Aggregate Demand curve shifted?

Answer 4

• Is caused by a change in variables such as consumption and exports

Question 5

Define Aggregate Demand.

Answer 5

• Is the total of all demands in the economy at any given price.

Question 6

What four components is national expenditure made out of?

Answer 6

• Consumption (C)
• Investment (I)
• Government Spending (G)
• Exports minus Imports (X-M)

Question 7

National Expenditure - what does consumption refer to?

Answer 7

• Is spending by households on goods and services

Question 8

National Expenditure - What does Investment refer to?

Answer 8

• This is spending by firms on investment goods

Question 9

National Expenditure - What does Government Spending refer to?

Answer 9

• Includes current spending like wages

- Includes governments capital investment. EG, roads and new schools

Question 10

What is the Aggregate Demand equation?

Answer 10

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

Question 11

What does the Aggregate demand curve show?

Answer 11

• Shows the relationship between the price level and the level of real expenditure in the economy

Question 12

Which axis is the Price Level on, in the Aggregate demand diagram?

Answer 12

Vertical Axis

Question 13

Which axis is the Real Output on, in the Aggregate demand diagram?

Answer 13

Horizontal Axis

Question 14

What is a change in Price Level?

Answer 14

Inflation

Question 15

What must Real Output on the x axis = ??

Answer 15

Real expenditure and Real Income

Question 16

What is Consumption expenditure influenced by?

Answer 16

• Rate of interest in an economy

Question 17

What happens to firms and consumers when prices RISE?

Answer 17

• Both need more money to buy the same number of goods and services as before

Question 18

How do firms and consumers get more money?

Answer 18

• By borrowing

Question 19

If prices rise then firms and consumers cannot buy as much as before, where do they get this extra money needed?

Answer 19

• Loans (Borrowing)

- So the demand for loans will increase

Question 20

Evaluative point for borrowing money.

Answer 20

• If banks have a fixed supply of money the rate of interest increase (so it becomes more expensive to borrow)
• A rise in interest rates leads to a fall in consumption

Question 21

What is another way a rise in price level affects consumption?

Answer 21

The wealth effect

Question 22

How doe the wealth effect affect consumption?

Answer 22

• If there is a rise in the price level the real value of an individuals consumers wealth being lower.
• A fall in real wealth will result in a fall in consumer spending

Question 23

What is investment affected by?

Answer 23

• Affected by changes in the rate of interest.

Question 24

What is business investment likely to be if interest rates are high?

Answer 24

Fewer projects are undertaken by firms because they are less profitable.