4) Components of Aggregate Demand - MMT

Question 1

how many components of AD are there?

Answer 1

5

Question 2

what are the 5 components of AD?

Answer 2

1) Consumption (C)
2) Investment (I)
3) Government Expenditure (G)
4) Exports (X)
5) Imports (M)

Question 3

when is C (consumption) almost always the biggest component of AD?

Answer 3

in a developed economy

Question 4

what is consumption (C)?

Answer 4

it refers to the total spending on goods and services by households, in order words, C= consumer spending

Question 5

what is consumer spending?

Answer 5

• the total amount of how much private individuals spend in shops, restaurants, hairdressers, cinemas etc

Question 6

what percentage is C of the UK’s AD?

Answer 6

60-65%

Question 7

what does C (for aggregate demand) stand for?

Answer 7

consumption

Question 8

what does I (for aggregate demand) stand for?

Answer 8

Investment

Question 9

what does G (for aggregate demand) stand for?

Answer 9

Government Expenditure

Question 10

what does X (for aggregate demand) stand for?

Answer 10

Exports

Question 11

what does M (for aggregate demand) stand for?

Answer 11

Imports

Question 12

investment is a… part of AD

Answer 12

critical

Question 13

what is investment?

Answer 13

it refers to any addition to Capital Stock of the economy - eg factories, machines, or any item that is used to produce other goods and services

Question 14

normally when we talk about I what do we mean?

Answer 14

spending by private sector businesses

Question 15

I is the most… of all the components

Answer 15

volatile (changeable)

Question 16

why can I be volatile?

Answer 16

often, it collapses in a recession and goes accelerates when the economy is strong

Question 17

what percentage of the UK’s AD is I?

Answer 17

15-20%

Question 18

what percentage of the UK’s AD is G?

Answer 18

20-25%

Question 19

put simply G=…

Answer 19

Government spending

Question 20

more precisely G=…

Answer 20

it is all government spending on goods and services needed by the country and spending on things that may benefit the country in the future

Question 21

eg in state schools what does G include?

Answer 21

includes the purchase of exercise books,teachers and potential building of blocks in school

Question 22

what does G not include?

Answer 22

it doesn’t include paying benefits like pensions; benefits are a transfer payment and don’t add new value to AD

Question 23

the UK has a relatively… government sector, responsible for between 20-25% of AD

Answer 23

big

Question 24

what are imports?

Answer 24

are goods and services that are produced in other countries but demanded by economic agents in this country

Question 25

why are imports negative?

Answer 25

they do not add value to our AD, they are a drain on our AD-demand is leaking out of this country’s economy to another

Question 26

in the AD equation we always treat… together (separate from the other components)

Answer 26

X and M together

Question 27

why does X-M usually give a negative value?

Answer 27

In the UK M is usually higher than X meaning X-M gives a negative value

Question 28

what is the AD equation?

Answer 28

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

Question 29

C is the… part of the AD equation

Answer 29

core (we assume that C is pretty stable)

Question 30

I+G+X are called…

Answer 30

injections

Question 31

what are injections?

Answer 31

components that’s ed value to AD

Question 32

M is a…

Answer 32

leakage

Question 33

what 3 leakages are there?

Answer 33

M (imports), Savings (S) and Taxation (T)

Question 34

what are leakages?

Answer 34

components that take value away from AD

Question 35

what is the equation when the economy is in equilibrium?

Answer 35

injections (I+G+X) = leakages (S+T+M)

Question 36

when should the economy expand?

Answer 36

if injections exceed leakages

Question 37

when would the economy shrink?

Answer 37

if leakages exceed injections