Theme 2: Aggregate Demand

Question 1

What is the equation for aggregate demand?

Answer 1

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

Question 2

C in the equation for aggregate demand?

Answer 2

Consumer spending- is how much consumers spend on goods and services.

Question 3

I in the equation for aggregate demand?

Answer 3

Investment- business spending on capital goods.

Question 4

G in the equation for aggregate demand?

Answer 4

Government spending- how much the government spends on state goods and services.

Question 5

X-M in the equation for aggregate demand?

Answer 5

Exports minus imports

Question 6

disposable income

Answer 6

Income remaining for a person to spend or save after all taxes and social security charges have been paid.

Question 7

6 influences on consumer spending

Answer 7

Tastes and preferences.
Consumer’s income.
Availability of substitutes
Number of consumers in the market.
Consumer’s expectations.
Elasticity vs. inelasticity

Question 8

Wealth effects

Answer 8

people who own assets eg houses see them appreciate in value which causes them to feel wealthier and therefore spend more.

Question 9

Gross investment

Answer 9

the amount that a firm invests in business assets that does not account for depreciation.

Question 10

Net investment

Answer 10

gross investment minus depreciation

Question 11

6 influences on investment

Answer 11

1-Rate of economic growth
2-Business expectations and confidence.
3-Demands for exports.
4-interest rates
5-Access to credit.
6-influence of government and regulations.

Question 12

Why does rate of economic growth effect investment?

Answer 12

If growth is high they will have higher profits and can therefore invest more.

Question 13

Why do interest rates effect investment?

Answer 13

Investment increases as interest rates fall. As the cost of borrowing is less and the return to lending is higher.

Question 14

Why does influence of government and regulations effect investment?

Answer 14

The rate of corporation tax could affect investment. Lower taxes means firms keep more profits, which could encourage investment.

Question 15

The ………… is when economic growth is fast, and it could be inflationary or unsustainable.

Answer 15

boom

Question 16

During ……………., there real output in the economy falls, and there is negative economic growth

Answer 16

recessions

Question 17

The economy goes through periods of booms and ………..

Answer 17

busts

Question 18

Fiscal policy

Answer 18

Government policy that attempts to manage the economy by controlling taxing and spending.

Question 19

How does fiscal policy work?

Answer 19

demand side policy.

Question 20

Expansionary fiscal policy

Answer 20

During periods of economic decline, the government might increasing spending and boost AD or reducing taxes.

Question 21

Contractonary Fiscal Policy

Answer 21

During periods of economic growth governments might decrease expenditure on purchases and also might increase taxes which reduces the size of the government budget deficit.

Question 22

What are the main influences on the net trade balances?

Answer 22

Real income,
exchange rates,
state of the world economy,
degree of protectionism
non-price factors.

Question 23

How does real income influence net trade balances?

Answer 23

During periods of economic growth consumers can afford more and therefore import more which is a deficit on the current account.

Question 24

How do exchange rates influence net trade balances?

Answer 24

Depreciation means imports become more expensive and exports are cheaper.

Question 25

How does the state of the world economy influence net trade balances?

Answer 25

A Decrease in real incomes abroad will cause a decrease in the revenue gained from exports and therefore a worsening of the net trade balance.

Question 26

How does degree of protectionism influence net trade balances?

Answer 26

Protectionist methods cause the trade deficit to reduce as the UK will be importing less due to tariffs and quotas on imports in the UK. However if it leads to retaliation exports might decrease too.

Question 27

How do non-price factors influence net trade balances?

Answer 27

The competitiveness of a countries goods and services influenced by supply side policies impacts how many exports a country has. A country can be more competitive by being innovative etc.