THEME 2 - Topic 3 - Aggregate Demand

Question 1

Name the components of aggregate demand

Answer 1

Consumption
Investment
Government expenditure
Exports - imports

Question 2

Define aggregate demand

Answer 2

The total spending on goods and services produced in an economy in a given period of time.

Question 3

Define the aggregate demand curve

Answer 3

Shows the relationship between the level of aggregate demand and the average price level - it shows the total expenditure at any given price.

Question 4

Define a movement along the aggregate demand curve

Answer 4

Is caused by a change in the average price level.

Question 5

Define a shift in the aggregate demand curve

Answer 5

Is caused by a change in any of the components of aggregate demand (I.E C, I, G, I and M).

Question 6

Why does the purchase of foreign goods and services cause the AD curve to be downward sloping?

Answer 6

If the average price level rises, domestic goods and services become less competitive domestically and abroard. Therefore, expenditure on domestic goods falls and consumption will shift to foreign goods, so exports will go down and imports will go up.

Question 7

Define consumption

Answer 7

Is the total amount of money spent by households on goods such a food, clothing etc.

Question 8

Define disposable income

Answer 8

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

Question 9

Define the consumption function

Answer 9

Shows the relationship between consumption and disposable income; its position depends on the other factors that affect how much households consume.

Question 10

Define investment

Answer 10

Spending on capital goods by firms.

Question 11

Name 7 factors which affect investment

Answer 11

Change in interest rates
Change in business confidence
Change in disposable income
Change in taxation
Profitability
Inflation
Access to credit

Question 12

Name 6 factors which affect consumer spending

Answer 12

Interest rate changes
Changes in employment levels
Wealth
Consumer confidence
Price expectations
Saving

Question 13

Define exchange rates

Answer 13

The value of 1 currency relative to another. Appreciation is when the value of the currency is getting stronger, depreciation is when the value of the currency is getting weaker relative to another.

Question 14

Why is the AD curve downward sloping?

Answer 14

1. Wealth effect
2. Interest rate effect
3. Purchase of foreign goods and services

Question 15

What is the wealth effect?

Answer 15

If the average price level increases, the value of assets decreases, so people feel worse off, and thus will have the tendency to buy less.

Question 16

Name 3 factors which affect net exports

Answer 16

Exchange rate changes
Income levels at home and abroard
Inflation
Protectionist policies