2.2 Aggregate demand

Question 1

What is aggregate demand

Answer 1

The total spending in an economy at different price levels

Question 2

What is the equation for aggregate demand

Answer 2

consumption + investment + government spending + (exports - imports)

Question 3

What causes a movement along the AD curve

Answer 3

Change in price

Question 4

What causes a shift of AD

Answer 4

• Changes in consumer spending
• Business investment
• Government spending
• Net exports.

Question 5

What is disposable income

Answer 5

Income left over for an individual or household after taxes have been paid.

Question 6

How does disposable income influence consumption

Answer 6

increased disposable income -> increase of consumption -> outward shift on AD graph

Question 7

what is the relationship between savings and consumption

Answer 7

inversely proportional

Question 8

what are 3 influences on consumer spending

Answer 8

• interest rates
• consumer confidence
• wealth effects

Question 9

How does interest rates impact consumption (decreasing interest)

Answer 9

Decrease in interest rates → Borrowing costs decrease → Loans become cheaper → Consumers borrow more and save less → They have more disposable income → Spend more → Increase in consumption

Question 10

How does consumer confidence impact consumption

Answer 10

high consumer confidence -> people are more inclined to make a big purchase -> increased consumption

Question 11

How does wealth effect impact consumption

Answer 11

Inflation causes value of assets to increase -> consumers feel wealthier -> increase in consumption

Question 12

Why might the wealth effect be invalid

Answer 12

Ricardo Sousa = not everyone is a homeowner, if house prices increase those who own a house will experience wealth effect -> increased consumption
those who are renters or want to purchase a house will save
those who are saving cancel out those consuming

Question 13

What is the difference between net and gross investment

Answer 13

Gross investment = Total amount that the economy spends on new capital
Net investment = value after depreciation

Question 14

What is depreciation

Answer 14

Measure in the loss in value of an asset over time

Question 15

How is net investment calculated

Answer 15

Gross investment - depreciation

Question 16

Describe the movements on an AD graph

Answer 16

decrease in price level = extension of AD (increase in GDP)
increase in price level = contraction of AD (decrease in GDP)

Question 17

What influences investment

Answer 17

• rate of economic growth
• business confidence
• animal spirits
• demand for exports
• interest rates
• access to credit
• government and regulations

Question 18

How does rate of economic growth impact investment

Answer 18

Economy grows at an healthy rate -> increase in demand -> increase investment in more capital

Question 19

How does business confidence impact investment

Answer 19

High confidence in the economy -> positive expectations about future economic conditions -> increased investment

Question 20

How does animal spirits impact investment

Answer 20

Confidence, optimism, entrepreneurial spirit increases -> decrease of rationality -> increased investment

Question 21

How does demand for exports impact investment

Answer 21

Rising demand for exports -> encourages firms to expand to increase profit -> increased investment

Question 22

How does interest rates impact investment

Answer 22

Low interest rates -> firms pay back less on loans -> increased investment

Question 23

How does access to credit impact investment

Answer 23

Access to credit improves financing options for businesses -> increased investment

Question 24

How does government regulations impact investment

Answer 24

Government insert tax incentives and subsidies -> firms have incentive to invest -> investment increase

Question 25

What influences government spending

Answer 25

* the trade cycle * fiscal policy

Question 26

What is the trade cycle

Answer 26

Fluctuations in economic activities over a period of time

Question 27

What is fiscal policy

Answer 27

Government strategies involving taxation and spending to influence the economy.

Question 28

What is government spending like during a boom

Answer 28

Governments reduce spending due to increased tax revenues and lower unemployment benefits

Question 29

What is government spending like during a bust

Answer 29

Government spending increases to stimulate the economy through programs like unemployment benefits and public works

Question 30

What is expansionary fiscal policy

Answer 30

Used in recessions to boost economic activity through increased spending and cuts

Question 31

What's contractionary fiscal policy

Answer 31

Used during booms to cool down the economy by reducing spending and increasing taxes

Question 32

What influences net trade

Answer 32

* real income * exchange rates * state of the world economy * degree of protectionism * non-price factors

Question 33

How does domestic income impact net trade

Answer 33

increased real income -> increased domestic income -> increased consumption (such as imported goods) -) worsens trade balance

Question 34

How does foreign income impact net trade

Answer 34

increased real income-> increased foreign income -> increase demand for exports -> improves trade balance

Question 35

How does exchange rates impact net trade (appreciation)

Answer 35

Stronger domestic currency -> exports become expensive imports cheaper -> people consume more goods in foreign countries -> worsens trade balance

Question 36

How does exchange rates impact net trade (depreciation)

Answer 36

Weaker domestic currency -> imports become expensive imports exports -> people consume more goods in domestically -> improves trade balance

Question 37

How does global economic growth impact net exports

Answer 37

World economy is strong -> demand for goods and services increase -> exporting countries benefit -> increased exporting

Question 38

What is protectionism

Answer 38

government actions and policies that restrict international trade to protect local businesses and jobs

Question 39

How does protectionism impact net trade

Question 40

How does interest rates impact consumption (increasing interest)

Answer 40

Increase in interest rates → Borrowing costs increase → Loans become more expensive → Consumers borrow less and save more (since saving is more rewarding) → They have less disposable income → Spend less → Decrease in consumption