Theme 2 - Aggregate Demand

Question 1

Microeconomics

Answer 1

The study of economic decisions taken by individual economic agents, including households and firms

Question 2

Macroeconomics

Answer 2

The study of the inter-relationships between economic variables at an aggregate (economy wide) level

Question 3

Aggregate demand

Answer 3

The total amount of spending on goods and services produced in an economy during a period of time

Question 4

Consumption

Answer 4

Total planned household spending

Question 5

Disposable income

Answer 5

The income that households have to devote to consumption and saving, taking into account payments of direct taxes and transfer payments

Question 6

Average propensity to consume (APC)

Answer 6

The proportion of income that households devote to consumption

Question 7

Marginal propensity to consume (MPC)

Answer 7

The proportion of additional income devoted to consumption

Question 8

Marginal propensity to save (MPS)

Answer 8

The proportion of an increase in disposable income that households would devote to saving

Question 9

Investment

Answer 9

Expenditure undertaken by firms to add to the capital stock

Question 10

Aggregate demand curve

Answer 10

The relationship between the level of aggregate demand and the overall price level; it shows planned expenditure at any given possible price level

Question 11

The circular flow of income (Output and expenditure)

Answer 11

A model of the economy which shows the movement of goods and services between households and firms, and their corresponding payments in money terms

Question 12

Withdrawals

Answer 12

Where money flows out of the circular flow int the form of savings, taxation and imports.

Question 13

Injections

Answer 13

Where money flows into the circular flow of income in the form of investment, government spending and taxation

Question 14

Income

Answer 14

A flow concept; the amount of income that is earned during a period of time

Question 15

Wealth

Answer 15

A stock concept; the accumulation of assets such as property or shares

Question 16

Multiplier

Answer 16

The ratio of a change in equilibrium real income to the autonomous change that brought it about. It is defined as one divided by the marginal propensity to withdraw

Question 17

Autonomous change

Answer 17

A change in spending on C, I and/or G which is independent of the level of income in the CFY model. (It is an injection into the existing CFY)

Question 18

Marginal propensity to import (MPM)

Answer 18

The proportion of additional income that is spent on imports of goods and services

Question 19

Marginal propensity to tax (MPT)

Answer 19

The proportion of additional income that is taxed

Question 20

Marginal propensity to withdraw (MPW)

Answer 20

The proportion of additional income that is withdrawn from the circular flow; the sum of the marginal propensities to save, import and taxe