2.2 Aggregate Demand

Question 1

Aggregate demand

Answer 1

Is the total amount of planned spending/ demand on goods and services at a given price level in an economy in a year

Question 2

AD Equation

Answer 2

CIG+(X-M)

Question 3

C

Answer 3

Consumption (most of AD)

Question 4

I

Answer 4

Investment

Question 5

G

Answer 5

Gov Spending

Question 6

X-M

Answer 6

Net trade (Exports - Imports)

Question 7

AD curve sloped downwards

Answer 7

-real balance effect
-international trade effect
-Interest rate effect

Question 8

Real balance effect

Answer 8

When price level rises PP of cash assets fall which leads to a decrease in demand for real output

Question 9

International trade affect

Answer 9

A rise in price level relative to other countries causes a decrease in international competitiveness causing a decrease in demand for exports and rising demand for imports

Question 10

Interest rate affect

Answer 10

Higher interest rate reduce consumption and investment because more expensive to loan/pay back money reducing PP

Question 11

Wealth affect

Answer 11

As income increases disposable income increases/PP consumer confidence increases stimulating AD

Question 12

Movement along AD curve

Answer 12

-due to changes in price level
-can cause an expansion (right) or contraction (left)

Question 13

Shift in A.D. curve

Answer 13

Shifts when any components of CIG + XM changes

Question 14

Consumption

Answer 14

-Spending of households on goods and services
-main component equals disposable income

Question 15

disposable income

Answer 15

-household income available from employment/private pension/ investments/welfare benefits after taxes have been deducted

Question 16

Average propensity to consume

Answer 16

-Proportion of disposable income spent on consumer G/S -APC= consumption/disposable income x100
-average propensity to save (proportion of disposable income saved)
- APC= saving/disposable income x 100

Question 17

Interest rate

Answer 17

Cost of Credit (borrowing)

Question 18

Interest rate affecting consumption

Answer 18

-Credit crunch more difficult to borrow money when rises -if rises cost of borrowing increases = decreases consumption
-money in savings value increase - encourages saving

Question 19

Consumer confidence influencing consumption

Answer 19

Future prospects has a has big influence on level of consumer expenditure i.e if think there’s going to be a recession encourages saving

Question 20

Wealth effect influencing consumption

Answer 20

-The effect on spending when assets prices change
-increase in house price = consumers feel wealthier encourages more spending
-cost-of-living increases = disposable income decreases

Question 21

Other factors influencing consumption

Answer 21

-Level of employment
-welfare benefits
- pension

Question 22

Investment

Answer 22

Increase in the capital stock

Question 23

gross investment

Answer 23

Total expenditure on new capital goods
gross investment = net investment + depreciation

Question 24

Net investment

Answer 24

New additions to capital stock after taking into account the fall in value of capital assets
Net investment = gross investment - depreciation
-More useful than Gross - tells us improvements in prospects for economy

Question 25

influences on investment

Answer 25

-Rate of economic growth -business expectations and confidence -Keynes and animal spirits -demand for exports -interest rates -access to credit -influence of government

Question 26

Rate of economic growth influencing investment

Answer 26

-Increase in real GDP firms need more capital to meet increase demand -increase real GDP = investment to rise and increase investment = real GDP to rise

Question 27

Business expectations and confidence influencing investment

Answer 27

If firms expects to sell more in future more likely to invest

Question 28

Keynes an animal spirits influencing investment

Answer 28

-Animal spirits describe instincts and emotion that may determine whether or not a firms decides to invest -decisions about whether to invest or not due to a degree of uncertainty or taken as a result of animal spirits

Question 29

Demand for exports influencing investment

Answer 29

-Sustained increase in demand for exports is likely to stimulate investment this is also dependent on exchange rate/rules and regulations

Question 30

Interest rates influencing investment

Answer 30

-Interest rates rise cost to borrow money = more expensive = investment falls - however rise may not deter investment if business still think profitable

Question 31

Access to credit influencing investment

Answer 31

Banks may be willing to take risks at low interest rates due to aftermath of 2008

Question 32

Influence of government on investment

Answer 32

Government policy might mean taxes or subsidies affecting firms to invest or not -e.g cut in corporation tax = firms more likely to invest -regulations/laws could also affect investment

Question 33

Government expenditure

Answer 33

spending by the public sector on goods and services such as education, health care and defence.

Question 34

Influences on government expenditure

Answer 34

-Trade cycle -fiscal policy

Question 35

Trade cycle influencing government expenditure

Answer 35

-Trade cycle = fluctuations in GDP during recession -government expenditure higher in recession due to e.g welfare benefits

Question 36

fiscal policy influencing government expenditure

Answer 36

-Use of government expenditure and taxation to influence level of economic activity -it can spend more or less than it receives from tax revenues =E.G Looser fiscal policy = tax cuts

Question 37

net trade X - M

Answer 37

-Exports - imports -shows outflow/inflow of money for foreign goods and services in an economy

Question 38

Influences on the net trade balance

Answer 38

-Real income -changes in the exchange rate -changes in the state of world economy -degree of protectionism -transport costs

Question 39

Real income influencing net trade balance

Answer 39

-higher real incomes can lead to increased demand for imports -trade balance weakens

Question 40

Changes in exchange rate influencing the net trade balance

Answer 40

-Exchange rate rises/pound become stronger net exports fall = exports become less internationally competitive = cheaper to import from abroad - trade balance weakens -however demand for exports and imports could be price inelastic

Question 41

State of world economy influencing net trade balance

Answer 41

Trade depends on other countries economies/growth rates E.G Eurozone crisis affected exports in the UK

Question 42

The degree of protectionism influencing net trade balance

Answer 42

other countries may have high tariffs and other restrictions making it difficult to export/import