2.2. Aggregate Demand

Question 1

what are the components of AD

Answer 1

consumption
governemnt spending
investment
(exports - imports)

Question 2

why is the AD curve downwards sloping

Answer 2

high prices means inflation
so more is spent on imports
or
interest rates are high which reduces spending

Question 3

how can a movement on the AD curve happen

Answer 3

A movement along the AD curve is caused by a
change in prices , caused by inflation or deflation

Question 4

how can a shift of the AD curve happen

Answer 4

A shift of the AD curve is caused by a
change in any other variable

Question 5

whats disposable income

Answer 5

the money consumers have left to spend , after taxes have been taken away and any state benefits have been added.

Question 6

what is MPC

Answer 6

how much an indivdual will spend after recieving £1
>1means they are borowing
<1 is a normal figure
1 means they spend evrything they recieve

MPC= change in consumption
change in income

Question 7

what is APC

Answer 7

the average amount spent on consumption out of total income

APC= total consumption
total income

Question 8

whas MPS and APS

Answer 8

marginal propensity to save
average propensity to save

Question 9

what factors influence consumer spending

Answer 9

interest rates
concumer confidence
wealth effect
preference
distribution of income (higher incomes have higher MPS)

Question 10

what is gross investment

Answer 10

the amount that a firm invests in business assets that does not account for depreciations

Question 11

what is net investment

Answer 11

the actual addition to the capital stock of an economy, after depreciations have been considered. Net investment= gross investment – depreciation.

Question 12

how does rate of economic growh effect investment

Answer 12

Rate of economic growth as businesses would be more confident about their investments and the
higher demand would lead to a higher return rate on the investment

Question 13

how does ‘animal spirits’ effect investment

Answer 13

businesses are confident about the future and expect future growth, investment will increase as they want to prepare for the future. If they are fearful of the future, then they will not invest money in new ideas or machinery as it may fail

Question 14

how does demand for exports effect investment

Answer 14

If the world economy is booming, demand for exports is likely to increase and therefore exporting firms’ investment is likely to increase to cope with this extra demand. This will have a knock-on effect and encourage other firms to increase their investment

Question 15

how does interest rates effect investment

Answer 15

Most investment is done through borrowing. High interest rates mean that borrowing is more expensive, so a business needs to be more confident of good profits in order to cover the extra costs of borrowing

Question 16

how does government regulations effect investment

Answer 16

Governments can encourage investment by their own policy decisions. For example, they could offer tax breaks or grants to businesses to try and encourage them to invest.

Question 17

how does the amount of retained profit effect investment

Answer 17

if firms are making higher retained profits,
investment is likely to increase as they have money available to invest.

Question 18

what effects government spending (3 things)

Answer 18

● The trade cycle : Decisions over government expenditure may be made in order to manage AD, and therefore regulate the trade cycle. In a recession, the government may increase spending in order to increase demand to reduce unemployment.
● Fiscal policy: its the decisions about government spending and taxes and it will depend on the priorities of the government. The level of government spending depends on what they lay out in their fiscal policy.
● Age distribution of the population: An ageing population leads to increased government expenditure on pensions, social care etc. whilst a young population leads to increased spending on education

Question 19

what does depretiation of the pound mean

Answer 19

imports are more expensive and exports
are cheaper, so the current account trade deficit narrows as people are less likely to buy imports and more likely to buy exports.

(SPICED- strong pound, imports cheap, exports dear)

Question 20

what are the main influences which effect net trade (5 things)

Answer 20

● Real income: When real income in the UK is high, there tends to be increased imports as people demand more goods However, if an increase in real
income is due to export-led growth then net trade will increase
● Exchange rates: SPICED
●State of world economy: If the UK’s main export country is doing well, then UK exports are likely to rise and so net trade is likely to rise.
● Non-price factors: Two non-price factors which affect net trade are quality and design and marketing. If UK goods are of a higher quality and design, exports will increase
● Prices: High prices of UK goods will mean that the goods are less competitive compared to international goods since people make decisions partly based on price. This means the volume of exports will decrease and the volume of imports will increase