Government Spending, Exports and Imports in Aggregate Demand

Question 1

Factors Affecting Government Spending

Answer 1

1. Policy Commitments (use of Fiscal Policy to achieve objectives).
2. The Government in power at the time.
3. Stage in business cycle.

Question 2

Factors Affecting Net Trade

Answer 2

1. Leve of Real Income - Real income increase leads to a rise in imports, may increase exports.
2. Exchange Rate - SPICED (Strong Pound Imports Cheaper Exports Dearer)
3. Quality and other non-price factors.
4. Economic performance of other countries.
5. Protectionism - (MAGA - Trump’s tariffs on Imports.

Question 3

Aggregate Demand Side Shocks

Answer 3

1. Recession in one or more of our trading partners.
2. A big rise or fall in the exchange rate.
3. Housing market slumps.
4. Share price collapses.
5. Events e.g. Financial Crisis/credit crunch.
6. Unexpected cuts or rises in interest rates and tax.