Components Of Aggregate Demand

Question 1

8 components of aggregate demand :

Answer 1

1. Interest rates
2. Level of income
3. Expected future income
4. Wealth
5. Consumer confidence
6. Availability of credit
7. Distribution of income
8. Expectations of future inflation

Question 2

Marginal propensity to consume (MPC)

Answer 2

The share of the last unit of income which is consumed.

• Gives an indication of how choices are made (now and in the future)

Question 3

Difference between LRAS and SRAS

Answer 3

• The SRAS curve shifts as a result of changes in input prices (price level)
• The LRAS curve remains at the full-employment output level even when input prices change.
  Not influenced by price level but is the maximum sustainable level of output that the economy can produce when the economy is on its PPF.

Question 4

Short run economic growth

Answer 4

Occurs when the economy uses spare capacity to increase real output. (A shift outwards within side the curve)

Question 5

Long run economic growth

Answer 5

The sustained rise in the quantity of goods and services that an economy produces

Question 6

LRAS

Answer 6

The aggregate supply when the economy is producing at its production potential (maximum)

Question 7

LRAS shows…

Answer 7

The amount of REAL OUTPUT that can be produced over a given period of time and with a given level of efficiency.

• Determined by the availability of factors of production, any change in FOPs will affect the capacity of an economy and cause a shift in LRAS.

Question 8

An increase in LRAS can show economic growth

Answer 8

• Underlying economic growth is shown as a rightward shift in the LRAS curve
• Underlying economic growth is also shown as an outward shift in the production possibility frontier (PPF).

Question 9

SRAS will shift if…

Answer 9

There are changes in the cost of production

Question 10

LRAS will shift by …

Answer 10

Changes in quantity/ quality in the factors of production

Question 11

The position of the LRAS is determined by what the economy can produce using its current available factors of production

Answer 11

• This means a change in any of its available FOPs will cause a shift in the LRAS
• This can either be an increase or improvement = quality or quantity of FOPs

Question 12

Aggregate supply

Answer 12

Measures the volume of goods and services produced each year.

Question 13

Examples of factors increasing LRAS include:

Answer 13

• Improvements in technological progress
• Increased factor mobility of FOPs
• Improvements in productivity of all FOPs
• Increased entrepreneurial skills in the economy
• The effectiveness of the institutional structure of the economy

Question 14

Examples of factors increasing LRAS include:

Answer 14

• Increases in the quantity and quality of capital stock in the economy
• Government policies targeting the supply side of the economy
• Incentives to invest (government policies encourage growth)
• Attitudes to hard work (Labour)

Question 15

Aggregate demand

Answer 15

The total demand for all goods and services produced in an economy

Question 16

Aggregate demand calculation

Answer 16

C + I + G + ( X - M )

C - consumption
I - investment
G - government spending
X - exports
M - imports

Question 17

Consumption

Answer 17

The expenditure of goods and services by households

Question 18

Investment

Answer 18

Expenditure by firms on capital goods

Question 19

Government spending

Answer 19

Expenditure by the government/ public sector on goods and services such as education, health care and defence

Question 20

Exports

Answer 20

Any goods or services produced domestically but sold abroad.

Question 21

Imports

Answer 21

Any goods or services that are produced abroad but sold domestically.