Macro - Characteristics Of AD

Question 1

Aggregate demand equation

Answer 1

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

Question 2

Aggregate demand (AD)

Answer 2

The total expenditure on an economy’s goods & services at any given price level

Question 3

Consumption (C)

Answer 3

Total spending by consumers on domestic goods/services

Question 4

Investment (I)

Answer 4

Spending that increases the size of a nations capital stock

Question 5

Government spending (G)

Answer 5

Spending set by the government to inject economic activity into the economy

Question 6

Net exports (X-M)

Answer 6

Export revenue - Import expenditure

Question 7

The importance of Aggregate demand

Answer 7

It is used by economists to measure the strength of a economy

Question 8

The importance of consumption

Answer 8

It makes up around 60% of the AD figure. This means that factors that affect consumption are likely to have a big impact upon AD

Question 9

The importance of investment

Answer 9

Makes up for around 15% of AD. Changes in investment shift the aggregate demand curve to the right or left by an amount equal to the initial change in investment times the multiplier.

Question 10

The importance of government spending

Answer 10

Makes up for around 25% of AD. Increased government spending is likely to cause a rise in aggregate demand (AD). This can lead to higher growth in the short-term. It can also potentially lead to inflation.

Question 11

The importance of net trade

Answer 11

Makes up around 1% of AD. This is one of the reasons why some countries such as the UK decide to ignore their current account deficit, as the effect it has on AD is minimal.

Question 12

Aggregate demand depends upon…

Answer 12

Domestic expenditure
Foreign expenditure

Question 13

Consumption depends upon…

Answer 13

Disposable income
Interest rates
Confidence

Question 14

Investment depends upon…

Answer 14

Profits
Interest rates
Confidence

Question 15

Government spending depends upon…

Answer 15

Tax revenue
Budget position
Debt burden

Question 16

net exports depends upon…

Answer 16

Exchange rates
Global demand
Relative inflation rate

Question 17

The AD curve

Answer 17

It shows the total spending on domestic goods and services at each price level. Horizontal axis shows real GDP & the vertical axis shows the price level.

Question 18

Why is the AD curve downwards slopping

Answer 18

The wealth affect
Increased exports revenue
Lower interest rates

Question 19

The wealth affect

Answer 19

When their is a fall in price level, this gives consumers the perception that they are wealthier as their purchasing power increases. This will lead to a increase in GDP

Question 20

Increase in export revenue

Answer 20

Decrease in prices for goods/services will lead to exports becoming cheaper. This will lead to export revenue to increase, leading to a increase in GDP

Question 21

Lower interest rates

Answer 21

As price level/inflation goes down interest rates may also decrease. Consumer investment may increase, leading onto real GDP increasing.

Question 22

What’s the difference between a movement/shift of the AD curve?

Answer 22

a change in the general price level of goods/services within an economy will cause a movement along the AD curve, whereas a change in the value of the components of AD will cause AD to shift.