2.2.1 the characteristics of AD

Question 1

aggregate demand (AD) (def.)

Answer 1

the total demand for all goods/services in an economy at any given general price level

Question 2

aggregate demand formula

Answer 2

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

AD = C + I + G + (X - M)

Question 3

consumption (def.)

Answer 3

the total spending on goods/services by consumers (households) in an economy

Question 4

investment (def.)

Answer 4

the total spending on capital goods by firms

Question 5

government spending (def.)

Answer 5

the total spending by the government in an economy

Question 6

net exports (def.)

Answer 6

the difference between the revenue gained from selling goods/services abroad and the expenditure on goods/services from abroad

Question 7

what are the %s that each component contribute to AD in the UK?

Answer 7

consumption : 60%

investment : 14%

government spending : 25%

net exports : 1%

Question 8

why is AD downward sloping?

Answer 8

interest rate effect - at higher GPL, there are lille to be higher interest rates, these reduce investment and are an incentive for households to save, and vice versa

wealth effect - as GPL increases, the purchasing power of households decreases and AD falls

exchange rate effect - as GPL falls, interest rates are likely to fall too, these lead to lower exchange rates too. with a lower ER, the economy’s goods/services are more attractive abroad and exports increase, therefore increasing real GDP

Question 9

movements along the AD curve

Answer 9

increase in GPL from GPL1 to GPL2 leads to a movement along the AD curve from A to B (contraction of real GDP from Y1 to Y2)

decrease in GPL from GPL1 to GPL2 leads to a movement along the AD curve from A to C (extension of real GDP from Y1 to Y3)

Question 10

shift of entire AD curve

Answer 10

increase in any component of AD = a rightwards shift of entire curve from AD1 to AD2

decrease in any component of AD = a leftwards shift of entire curve from AD1 to AD3