Theme 2.2 - Aggregate demand (AD)

Question 1

2.2.2 - What is consumption (C)?

Answer 1

Spending on consumer goods and services over a period of time

Question 2

2.2.2 - What is the relationship between savings and consumption?

Answer 2

• Savings is what is not spent on income

Question 3

2.2.2 - What is marginal propensity to save?

Answer 3

• Marginal propensity to save is how much of an increase in income is saved
• MPS = change in savings/change in income

Question 4

2.2.2 - What is average propensity to save?

Answer 4

• Average propensity to save is the average amount saved out of income
• APS = total savings/total income

Question 5

2.2.2 - What is disposable income(Y)?

Answer 5

The money consumers have left to spend after taxes are taken and benefits are added

• Larger incomes = more to spend
• poorer people tend to have a higher MPC as the are likely to spend much more of their increase in income whilst richer people are more likely to save it

Question 6

2.2.2 - What are other influences on consumer spending?

Answer 6

• Interest rates - high interest = reduced consumption
• Consumer confidence - high confidence = increase in spending, expect recession = reduction in spending
• Wealth effect - experienced when real house prices rise as owners now have more wealth so are confident to spend more
• Distribution of income
• Tastes and attitudes - strong materialist drive encourages people to have the newest and best - high spending

Question 7

2.2.3 - What is investment (I)?

Answer 7

The addition of capital stock to the economy eg machines

Question 8

2.2.3 - What is gross and net investment?

Answer 8

• Gross investment is the amount of investment carried out and ignores the level of depreciation
• Net investment is gross investment minus the value of depreciation

Question 9

2.2.3 - What are some influences on investment?

Answer 9

• Rates of economic growth
• Business expectations and confidence
• Animal spirits (Keynes)
• Demand for exports
• Interest rates
• Access to credit
• Influence of government and regulations

Question 10

2.2.3 - How does rates of economic growth influence investment?

Answer 10

in a growing economy there will be higher levels on investment as businesses wild be more confident about their investments

Question 11

2.2.3 - How does business expectations and confidence infleunce investment?

Answer 11

confidence causes an increase in investments as they want to prepare for the future

Question 12

2.2.3 - How does animal spirits (Keynes) infleunce investment?

Answer 12

describes the feeling of managers and owners of firms on whether their investment would be profitable
- think it will be caused higher investment

Question 13

2.2.3 - How does demand for exports infleunce investment?

Answer 13

world economy booming - demand for exports is likely to increase and therefore exporting firms investment likely to increase to cope with extra demand

Question 14

2.2.3 - How does interest rates infleunce investment?

Answer 14

most investment done through borrowing or retained profits/savings
- high interest rates would cause borrowing to be more expensive so less investment through borrowing done

Question 15

2.2.3 - How does access to credit infleunce investment?

Answer 15

investment lower when an investment has a high risk attached to it - less access credit and interest rates higher

Question 16

2.2.3 - How does the influence of government and regulations infleunce investment?

Answer 16

can encourage investment by policy decisions eg tax breaks or grants