Components of AD

Question 1

AD

Answer 1

total planned real expenditure on a country’s goods and services produced within an economy, over a given period of time

Question 2

how much does consumption make up of AD?

Answer 2

65%

Question 3

how much does government spending make up of AD?

Answer 3

25%

Question 4

how much does investment make up of AD?

Answer 4

15%

Question 5

how much does net exports make up of AD?

Answer 5

5%

Question 6

what are the components of AD?

Answer 6

C +I + G + (X-M)
consumption + investment + gov. spending + net exports

Question 7

consumption

Answer 7

spending by households on goods and services

Question 8

investment

Answer 8

spending by firms on capital goods

Question 9

current government spending

Answer 9

spending on wages and salaries

Question 10

capital government spending

Answer 10

spending on investment goods (e.g. new roads)

Question 11

exports

Answer 11

foreigners spending money on goods produced produced in the domestic economy

Question 12

imports

Answer 12

households and firms spending on goods produced abroad

Question 13

CPI (consumer price index)

Answer 13

measures the average price level, to help us calculate inflation

Question 14

what is the only factor that causes a contraction or extension?

Answer 14

a change in prices

Question 15

what is on the x and y axis on the ad curve?

Answer 15

x axis = real output (Y)
y axis = price level (P)

Question 16

what will happen if prices rise and therefore people borrow more money?

Answer 16

the demand for loans will increase, allowing consumption to continue. however, it is likely there will be an increase in the interest rate as there is a fixed money supply.

Question 17

how does a rise in price levels affect wealth effects?

Answer 17

a rise in price levels lead to the real value of an individual consumer’s wealth being lower, leading to a fall in consumer spending

Question 18

how is investment affected by the rate of interest?

Answer 18

the higher the rate of interest, the less profitable new investment projects become so fewer projects are undertaken (lower the rate of investment)

Question 19

what is government spending assumed to be independent from?

Answer 19

economic variables, therefore it is assumed to be determined by political decisions

Question 20

how will exports and imports be affected by higher prices levels?

Answer 20

foreign firms will be able to compete more successfully in the UK economy and British manufacurers will struggle to export as they charge higher prices

Question 21

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