2.2 - Aggregate Demand

Question 1

What are movements along the AD curve caused by

Answer 1

A change in the average price level (inverse relationship)

Question 2

What is the savings ratio

Answer 2

the ratio of savings to income (S/Y)

Question 3

What are wealth effects

Answer 3

happen if asset prices rises and consumers feel as though they have more money, they may spend more if share prices or property prices rise

Question 4

What is gross investment

Answer 4

amount of investment carried out and ignores the level of depreciation

Question 5

What is net investment

Answer 5

gross investment minus the value of depreciation

Question 6

How do real incomes influence net trade

Answer 6

when UK real incomes are high, increased imports as people demand more goods and services and the UK cannot meet the needs. However if the increase in real income is due to export led growth then net trade will increase

Question 7

How does the price elasticity of imports affect the influence exchange rates have on net trade

Answer 7

price elastic imports mean a rise in price causes a large fall in demand so the value of imports will fall. If imports are inelastic, a rise in price will cause a large fall in demand so the value of imports will fall

Question 8

How do high price influence net trade

Answer 8

high prices in the UK mean goods are less competitive compared to international goods since people make decisions based on price. Volume of exports will decrease and imports will increase. Prices are affected by inflation rate, higher UK inflation rate than other countries mean prices rise quicker If PED is elastic, higher prices cause a fall in net trade