The Characteristics of aggregate demand 2.2.1 unit 23

Question 1

What is aggregate Demand and what are the components that it is made up of?

Answer 1

Aggregate demand is the total of all demands or expenditures in the economy at any given price.

-Consumption: This is spending by households on goods and services.
-Investment: This is spending by firms on investment goods.
-Government spending: This includes current spending for instance wages and salaries. It also includes investment on goods such as roads or new schools.
-(X-M): X = Monet spent by foreigners in our domestic economy.
M = Money spent by households, firms and governments abroad.

Question 2

What is the domestic economy?

Answer 2

It is the economy of a single country.

Question 3

What effects the level of consumption within an economy?

Answer 3

Factors that will decrease consumption:-
-If the rate of interest increases consumption will decrease as households are incentivised to save money and they are less likely to buy ‘durable goods’ as the cost of these goods will increase unless you can pay cash for them.
Factors that will increase consumption:-
-If the rate of interest decrease as the opposite of the above will be true.
-Also the ‘wealth effect’ will occur which is a theory suggesting that when the value of equity portfolios are on the rise because of accelerating stock prices, individuals feel more comfortable and confident about their wealth, which will cause them to spend more.

Question 4

What effects the level of business investment in an economy?

Answer 4

Factors that will decrease consumption:-
-If the rate of interest increases investment will decrease as firms are incentivised to save money and they are less likely to invest in ‘capital goods’ as the cost of these goods will increase unless you can pay cash for them.
-Also the accelerator effect will play a role which is a theory that believes businesses are waiting for a upturn in the economy before they start investing and when this upturn occurs businesses invest heavily resulting in further increases in the growth of an economy.
-Also increased confidence in businesses caused by ‘animal spirits’ would result in larger business investment.
Factors that will increase consumption:-
-If the rate of interest decrease as the opposite of the above will be true.

Question 5

what factors will effect (X-M)?

Answer 5

Factors that will decrease (X-M):-
Strong
Pound
Imports
Cheap
Exports 
Dearer