Introduction to Aggregate Demand

Question 1

What is the definition of Aggregate?

Answer 1

-The Total spending on goods and services in an economy over a period of time.

Question 2

What is the formula for Aggregate Demand?

Answer 2

AD = Consumption (C) + Investment (I) + Government Spending (G) + (Spending on exports - Spending on Imports)

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

Question 3

What is the definition of consumption?

Answer 3

Spending on goods and services

Question 4

What is the definition of investment

Answer 4

-Gross Domestic Fixed Capital Formation
-Investment spending on assets used over a number of years to produce goods and services (Businesses)

Question 5

What does investment consist of ?

Answer 5

Spending on capital goods (machinery and vehicles) and on working capital (stocks of finished goods and work in progress).

Question 6

What is the definition of government spending?

Answer 6

-Spending on publicly provided goods and services

Question 7

Definition of exports

Answer 7

-UK output sold abroad

Question 8

Definition of imports

Answer 8

-Foreign output purchased by UK.

Question 9

What are the reasons for the AD curve downsloping

Answer 9

-Real balance effect - As P level rises, the real value of incomes falls = consumers, govt, business less able to buy what they want or need.

-Interest rates - as P level rises, the bank of england will increase interest rate which will reduce consumption and investment.

Question 10

What causes a shift in the AD curve?

Answer 10

-Changes in the components of Aggregate Demand.