The determinants of aggregate demand

Question 1

What is aggregate demand (AD)?

Answer 1

Aggregate demand (AD) is the total spending on goods and services in an economy at a given price level and time period. It is made up of consumption (C), investment (I), government spending (G), and net exports (X - M), where AD = C + I + G + (X - M).

Question 2

What are the main determinants of the components of aggregate demand?

Answer 2

-Consumption (C): Influenced by income levels, consumer confidence, interest rates, and wealth

-Investment (I): Depends on business confidence, interest rates, and technological advancements

-Government Spending (G): Affected by fiscal policies and government objectives

-Net Exports (X - M): Determined by exchange rates, foreign income levels, and domestic competitiveness

Question 3

What is the accelerator process, and what are the main determinants of savings?

Answer 3

Accelerator Process: A theory suggesting that investment levels are related to the rate of change of GDP. Rapid growth in demand can lead to higher investment as firms increase capacity

Determinants of Savings: Include income levels, interest rates, consumer expectations, and availability of savings schemes. Higher incomes typically increase savings, while low-interest rates discourage it

Question 4

What is the difference between saving and investment?

Answer 4

Saving refers to income not spent on current consumption, while investment is spending on capital goods to increase future productive capacity. Savings provide the funds for investment, but they are not the same.