MACRO-The AD curve

Question 1

Explain three factors which explain why the AD curve is Sloping downwards

Answer 1

-The Wealth effect
-The Trade effect
-The Interest rate effect

Question 2

Why does the Wealth Effect explain why the AD curve is downward sloping

Answer 2

As the average price falls individuals can purchase more of a good or service with the same money therefore consumption will increase

Question 3

Why does the Trade effect explain why the AD curve is downward sloping

Answer 3

When price falls exports become more competitive/affordable, thus increasing exports

Question 4

Why does the Interest rate Effect explain why the AD curve is downward sloping

Answer 4

When prices are low interest rates are likely to be low, which increases the GDP and Consumption

Question 5

What will happen to the AD curve if Interest rates Increase

Answer 5

-Interest rates increase significantly
-Investment Increases
-Rewards for saving increase
-Reward for borrowing decreases
-People borrow less and save more
-Consumption falls
-Consumption is the biggest component of AD (65%)
- Aggregate demand is likely to fall
- This is especially a problem for the UK as it is a nation of Home owners
-People with variable rate mortgages will see their mortgages increase

Question 6

What will happen to the AD curve is Consumption increases

Answer 6

Shifts to the right as consumption makes up 65% of the AD

Question 7

What will happen to the AD curve is Investment increases

Answer 7

Shifts to the right as investment makes up 10-15% of AD

Question 8

What does derived demand mean

Answer 8

when the demand for a good or service produces a corresponding demand for a related good or service