4.2 A - Aggregate Demand

Question 1

Aggregate Demand

Answer 1

the total expenditure on an economy’s goods and services at any given price level.

Question 2

consumption

Answer 2

total spending by consumers on domestic goods and services

Question 3

Investment

Answer 3

Spending that increases the size of a nations capital stock

Question 4

Government Spending

Answer 4

Spending set by the government to inject economic activity into an economy

Question 5

Net exports (X -M)

Answer 5

Net trade component: export revenues less import expenditure

Question 6

How much does consumption make of the UK’s GDP

Answer 6

66%

Question 7

How much does investment make of the UK’s GDP

Answer 7

18%

Question 8

How much does government spending make of the UK’s GDP

Answer 8

20%

Question 9

How much does net exports make of the UK’s GDP

Answer 9

-4%

Question 10

What is the equation for Aggregate demand

Answer 10

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

Question 11

How do you draw an AD graph

Answer 11

X axis - real output
Y axis - price level

Question 12

What direction does the AD graph slope

Answer 12

Downwards - As the average price level falls, AD increases and real output increases

Question 13

movement on AD graph

Answer 13

When the average price level in an economy changes

real output changes with the price level

Question 14

Shift on AD graph

Answer 14

Any other relevant factors affecting AD other than price level

real output changes at every given price level

Question 15

Wealth effect definition

Answer 15

Shows how the price level affects real incomes

Question 16

Trade effect definition

Answer 16

Shows how the price level affects trade patterns

Question 17

Interest Rates effect definition

Answer 17

Shows how the price level effects borrowing costs

Question 18

price level definition

Answer 18

Buying power of money - inflation

Question 19

Wealth effect short-run explained

Answer 19

In the short-run Income and wealth positions are unchanged

Question 20

Wealth effect exaplained

Answer 20

price level decreases
real output increases
- people feel wealthier and spend more, increasing Consumption and movement down the AD curve

Vice versa

Question 21

Trade effect explained

Answer 21

Assuming ceteris paribus
If domestic prices decrease –> demand for exports increases
If domestic prices decrease –> demand for imports decreases

causes movement in AD curve to the right

Question 22

What is the relationship between price level and real output (AD graph)

Answer 22

Inversely proportional

As price level decreases real output increases

Question 23

how do interest rates decrease when price level decreases

Answer 23

Consumers need money to purchase things… If
Price level decrease
Asset demand increases - put into savings…

As assets prices increase the return on that asset decreases
causing interest rates to decrease

Therefore
price level decrease
interest rates decrease

Question 24

How does interest rate effect, effect AD

Answer 24

Interest rates decrease, means more borrowing
Investment increases
Consumption increases
AD moves downwards

Question 25

Inward AD shift

Answer 25

Ad decreases at every given price level and real output is lower

Question 26

outward AD shift

Answer 26

Increase in AD at every given price level, real output is higher

Question 27

factors AD in an economy (causes shifts)

Answer 27

Shifts occur due to a change in an AD component which may change due to: - Confidence - exchange rates - Interest rates - Population rates - Wealth changes - Tax changes

Question 28

Which components does confidence effect in an AD graph

Answer 28

- C - I - G - M - not X because thats to do with foreign demand

Question 29

Which components does exchange rates effect in an AD graph

Answer 29

- X - M WPIDEC SPICED

Question 30

Which components does interest rates effect in an AD graph

Answer 30

-C -I -G -X -M

Question 31

Which components does Population changes effect in an AD graph

Answer 31

- C -I -G -M

Question 32

Which components does Wealth changes effect in an AD graph

Answer 32

-C -I -M

Question 33

Which components does tax changes effect in an AD graph

Answer 33

-C -I -M

Question 34

What shifts does confidence cause on AD

Answer 34

Rises: Positive AD impact Falls: Negative AD impact

Question 35

What shifts does exchange rates cause on AD

Answer 35

Rises: Negative impact on AD Falls: Positive AD impact

Question 36

What shifts does Interest rates cause on AD

Answer 36

Rises: negative AD impact Falls: positive AD impact

Question 37

What shifts does population changes cause on AD

Answer 37

Rises: Positive AD impact Falls: Negative AD impact

Question 38

What shifts does wealth changes cause on AD

Answer 38

Rises: Positive AD impact Falls: Negative AD impact

Question 39

What shifts does Tax changes cause on AD

Answer 39

rises: Negative AD impact Falls: Positive AD

Question 40

multiplier effect

Answer 40

The process by which expenditure generates a trail of subsequent expenditure so that the resultant change in national income will exceed the amount initially expended.

Question 41

propensity to consume

Answer 41

the proportion of income that is used to buy goods and services

Question 42

the average propensity to consume

Answer 42

The proportion of total income that is consumed = consumption / income

Question 43

marginal propensity to consume MPC

Answer 43

the proportion of a change in income that is consumed = change in consumption / change in income

Question 44

multiplier effect formula

Answer 44

1 --------- 1 - mpc

Question 45

Marginal propensity to save MPS

Answer 45

the proportion of total income that is saved

Question 46

MPS + MPC

Answer 46

= 1

Question 47

How does the multiplier effect work

Answer 47

> gov spends 100 --> person 1 spends 50 and saves 50 -----> person 2 spends 25 and saves 25 ---------> person 3 spends 12.5 and spends 12.5 assuming the MPC and MPS are the same: initial spent = 100 multiplier of 1/0.5 = 2 total spending = 200