Macroeconomics - L2 Aggregate Demand

Question 1

What is Aggregate Demand?

Answer 1

A measure of the total amount/quantity demanded for all finished goods and services in an economy.

Question 2

List the 5 components of AD.

Answer 2

1. Private Consumption Expenditure (C)
2. Private Investment Expenditure (I)
3. Government Expenditure (G)
4. Exports (X)
5. Imports (M)

Question 3

What is private consumption expenditure?

Answer 3

The total value of all expenditure on goods and services incurred by households.

Question 4

What is private investment expenditure?

Answer 4

Expenditure with the purpose of expanding the productive capacity and productivity of firms.

Question 5

What is government expenditure?

Answer 5

Spending by all levels of government on a variety of goods and services.

Question 6

What are exports?

Answer 6

Goods and services produced in Australia that are purchased by foreign households, businesses, governments or other institutions.

Question 7

What are imports?

Answer 7

Goods and services produced overseas that are purchased by Australian households, businesses, governments or other institutions.

Question 8

Why are imports subtracted from exports when calculating AD?

Answer 8

Because money spent on imports leaves the Australian economy and goes into the bank accounts of overseas businesses, boosting overseas economies. When calculating AD, we are only interested in spending that boosts the Australian economy.