Theme 2 - The UK economy - Performance and Policies (2.2 - Aggregate Demand)

Question 1

Define Aggregate Demand [1]

Ref - 2.2.1 - The Characteristics of Aggregate Demand

Answer 1

The total of all demands and expenditures in the economy [1]

Question 2

Describe what an aggregate demand curve is presented as [2]

2.2.1 - The Characteristics of Aggregate Demand

Answer 2

Price level on the x-axis and Real GDP on the y-axis [1]
The line slopes downwards, and is inversely proportional. [1]

Question 3

What is the main reason for the aggregate demand curve sloping downwards? [2]

2.2.1 - The Characteristics of Aggregate Demand

Answer 3

An increase in the price level reduces the purchasing power of households and firms, [1] so this reduces the quantity demanded. [1]

Question 4

What causes a movement along the aggregate demand curve? [1]

2.2.1 - The Characteristics of Aggregate Demand

Answer 4

A change in the price level [1]

Question 5

What causes a shift in the aggregate demand curve? [1]

2.2.1 - The Characteristics of Aggregate Demand

Answer 5

Changes in the components of aggregate demand [1]

Question 6

What is the formula used to calculate aggregate demand? [1]

Ref - 2.2.1 - The Characteristics of Aggregate Demand

Answer 6

AD = C + I + G + (X - M) [1]

Question 7

State what each part of the aggregate demand formula shows [4]

Ref - 2.2.1 - The Characteristics of Aggregate Demand

Answer 7

C - Consumption [1]
I - Investment [1]
G - Government Spending [1]
(X - M) - (Exports - Imports) [1]

Question 8

Define Consumption [1]

Ref - 2.2.2 - Consumption

Answer 8

Spending on consumer goods and services over a period of time [1]

Question 9

Describe the difference between durable and non-durable goods [2]

Ref - 2.2.2 - Consumption

Answer 9

Durable goods continue to provide a stream of services over time [1]
Non-durable goods are used up over a short period of time [1]

Question 10

Define disposable income [1]

Ref - 2.2.2 - Consumption

Answer 10

Household income which has been accounted for taxation. [1]

Question 11

State the formula used to calculate the marginal propensity to consume [2]

Ref - 2.2.2 - Consumption

Answer 11

Change In Consumption [1]
__________________________
Change In Income [1]

Question 12

State the formula used to calculate the marginal propensity to save [2]

Ref - 2.2.2 - Consumption

Answer 12

Change in savings [1]
______________
Change in income [1]

Question 13

Describe the relationship between savings and consumption [3]

Ref - 2.2.2 - Consumption

Answer 13

Disposable income is either spent on consumption or saved [1] (Y = C+S), but rearrange for S (S = Y-C) [1] and S represents a proportion of income not spent. [1]

Question 14

Explain 2 other factors which may determine consumption [4]

Ref - 2.2.2 - Consumption

Answer 14

Interest rates [1] - If the cost of borrowing money i high, less people will borrow from banks, so less consumption [1]

Wealth effect [1] - Increases in their asset prices increases consumer confidence, incentivising increased consumption. [1]

Question 15

Define saving [1]

Ref - 2.2.2 - Consumption

Answer 15

A portion of a households income which is not spent [1]

Question 16

Define Investment [1]

Ref - 2.2.3 - Investment

Answer 16

The purchase of capital goods which are used to create other goods and services [1]

Question 17

What is the difference between gross and net investment? [2]

Ref - 2.2.3 - Investment

Answer 17

• Gross investment shows spending on capital goods before depreciation. [1]
• while net investment takes depreciation into account. [1]

Question 18

Explain 2 factors which influence investment from firms and businesses [4]

Ref - 2.2.3 - Investment

Answer 18

Access to credit [1] - If banks are less willing to give out credit, there will be less money for businesses to invest [1]

Business Confidence [1] - Animal spirits shows the mood of a business. If there is little confidence in a business, they will feel less inclined to invest [1]

Question 19

Describe the difference between physical and human capital [2]

Ref - 2.2.3 - Investment

Answer 19

Human capital - Investment in training/education of workers [1]
Physical captial - Investment in factories, offices etc. [1]

Question 20

Describe the accelerator theory [2]

Ref - 2.2.3 - Investment

Answer 20

The accelerator theory states that investment increases, when the economy is at full capacity. [1] This is in order to continue economic growth once full capacity has been reached. [1]

Question 21

State and explain 2 factors which may influence the effectiveness of the accelerator theory. [4]

Ref - 2.2.3 - Investment

Answer 21

Avaliability of credit. [1] - Influences the amount a firm can invest. [1]
Corporation tax. [1] - Influences how must profit is left over to reinvest. [1]

Question 22

Define government expenditure [1]

Ref - 2.2.4 - Government expenditure

Answer 22

The total of all spending by local and national government [1]

Question 23

Explain the 2 factors influencing government expenditure [4]

Ref - 2.2.4 - Government expenditure

Answer 23

Trade cycle - Automatic stabilizers reduces fluctuations in AD [1] by controlling the level of government spending during a boom/recession. [1]
Discretionary fiscal policy - Choosing when to incr./decr. gov. spending [1] to achieve macroeconomic objectives. [1]

Question 24

Define Net Exports [1]

Ref - 2.2.5 - Net Trade

Answer 24

The value of exports minus the value of imports (X-M) [1]

Question 25

Explain 2 factors which influence net exports [4]

Ref - 2.2.5 - Net Trade

Answer 25

Prices - The higher the price of a good, the lower the demand is [1] therefore the number of net imports decrease, which increases net exports [1]

Exchange rate - If UK currency increases in value, this means other countries will be less inclined to import from the UK [1] therefore net trade will decrease, so profits decrease [1]

Question 26

Define the exchange rate [1]

Ref - 2.2.5 - Net Trade

Answer 26

The price of one currency in terms of another [1]

Question 27

Describe the impact of a weaker exchange rate on net exports. [2]

Ref - 2.2.5 - Net Exports

Answer 27

• Imports will become more dearer [1]
• Exports will become more plentiful [1]

Question 28

Explain 2 factors influencing net exports. [4]

Ref - 2.2.5 - Net Exports

Answer 28

• Inflation can increase costs for UK firms [1] so their products become less internationally competitive. [1]
• Non-price factors [1] - Things such as quality and reliability of a product can influence international demand. [1]