Lesson 4 - Aggregate Demand

Question 1

What is aggregate demand?

Answer 1

Total spending on all goods and services in an economy at any given price level

Question 2

What are the 4 components of AD?

Answer 2

Consumption, investment, government spending, next exports

Question 3

What is the equation for AD?

Answer 3

AD = gov spending + investment + consumption + (exports - imports)

Question 4

What is investment?

Answer 4

Spending on capital by firms

Question 5

What incentivises firms to invest?

Answer 5

• high profits
• high prices

Question 6

Describe the multiplier effect

Answer 6

• any injection/change to a component of AD will have an every greater change to the economy

Question 7

What does the multiplier effect size depend on?

Answer 7

How big the leakages are - lower leakages = the injection can go around more times

Question 8

What is the formula for the multiplier effect?

Answer 8

1 / (1- MPC) OR 1/MPS

Question 9

What is the accelerator effect?

Answer 9

The idea that when we get growth and consumption increases, the increase in profits encourages firms to invest, which leads to more growth