MACRO - LS3 - Aggregate Demand (Part 1 & 2)

Question 1

Aggregate Demand definition

Answer 1

It’s the total amount of spending on goods and services demanded in an economy during a period of time

Question 2

AD Equation

Answer 2

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

Question 3

UK AD

Answer 3

• described ad consumption driven economy
• AD increased over years
• gov spending second largest

Question 4

What does AD graph look like

Answer 4

Slopes downwards
- y-axis Price level (P)
- x-axis - Real GDP (Y)

Question 5

Reasons why AD slopes downwards

Answer 5

• wealth effect - if prices increase, wealth decrease, feel worse off so cut down on spending to save, so as price increases, less output demanded
• international trade effect - if domestic prices increase, exports are more expensive so less demanded, also other countries goods relatively cheaper so import more, so rising price causes fall in (X-M)
• interest rate effect - if price increases, more money is needed, causes increase in demand for money, which leads to interest rate increase. As interest restes increase, so does borrowing causing decrease in purchases by borrowing and investment, so increase in price leads to fall of quantity demanded
• real income effect - as prices fall, real value of income rises so consumers can buy more, increase in quantity demanded

Question 6

Price level meaning

Answer 6

• average price level in an economy

Question 7

Wealth meaning

Answer 7

Value of assets
E.g. houses/stocks/bonds/art/jewellery

Question 8

What causes movement/shift of AD Curve

Answer 8

• movement - change in price
• shift - any other factor - components of AD

Question 9

What does shift to left/right mean

Answer 9

• left - decreases AD - for any price level a smaller amount of real GDP is demanded
• right - increases AD - for any price level a larger amount of real GDP is demanded

Question 10

Reasons for AD to shift to the left

Answer 10

• Fall in net exports (M>X)
• Cuts in government spending-
• Higher interest rates- reducing consumer confidence and spending
• Decline in household wealth and confidence

Question 11

Reasons for AD to shift to the right

Answer 11

• Depreciation on the exchange rate making exports more competitive in overseas markets
• Cuts in direct and indirect taxes
• Increase in house prices causing consumer wealth and confidence to grow
• Expansion on supply of credit and lower interest rates