AD

Question 1

What is Aggregate Demand (AD)?

Answer 1

The total level of spending in the economy at any given price.

Question 2

What are the components of Aggregate Demand (AD)?

Answer 2

AD = C + I + G + (X-M), where C=Consumption, I=Investment, G=Government Spending, and (X-M)=Net Exports.

Question 3

Which component makes up the largest part of AD?

Answer 3

Consumption (C), accounting for about 60%.

Question 4

What does investment refer to in the context of AD?

Answer 4

Spending by businesses on capital goods, such as new equipment and buildings.

Question 5

Are transfer payments included in government spending (G) when calculating AD?

Answer 5

No, because money is just transferred from one group to another.

Question 6

What does net exports (X-M) represent?

Answer 6

Exports minus imports.

Question 7

Why is the AD curve downward sloping?

Answer 7

Income effect, Substitution effect, Real balance effect, Interest rate effect.

Question 8

Explain the ‘income effect’ in relation to the AD curve.

Answer 8

A rise in prices reduces real incomes, so people buy less.

Question 9

Explain the ‘substitution effect’ in relation to the AD curve.

Answer 9

Higher UK prices lead to fewer exports and more imports, decreasing net exports.

Question 10

Explain the ‘real balance effect’ in relation to the AD curve.

Answer 10

Higher prices reduce the real value of savings, leading to less spending.

Question 11

Explain the ‘interest rate effect’ in relation to the AD curve.

Answer 11

Rising prices increase demand for money, raising interest rates, leading to less borrowing and investment.

Question 12

What causes a movement along the AD curve?

Answer 12

A change in prices, due to inflation or deflation.

Question 13

What causes a shift of the AD curve?

Answer 13

A change in any variable other than price.

Question 14

What is disposable income?

Answer 14

The money consumers have left to spend after taxes and state benefits.

Question 15

What is the most important factor determining the level of consumption?

Answer 15

Disposable income.

Question 16

What is the Marginal Propensity to Consume (MPC)?

Answer 16

How much an increase in income affects consumption.

Question 17

What is the Average Propensity to Consume (APC)?

Answer 17

The average amount spent on consumption out of total income.

Question 18

What is the formula for MPC?

Answer 18

MPC = $\frac{\text{change in consumption}}{\text{change in income}}$

Question 19

What is the formula for APC?

Answer 19

APC = $\frac{\text{total consumption}}{\text{total income}}$

Question 20

What is the relationship between savings and consumption?

Answer 20

An increase in consumption decreases savings (and vice-versa).

Question 21

What is the Marginal Propensity to Save (MPS)?

Answer 21

How much of an increase in income is saved.

Question 22

What is the Average Propensity to Save (APS)?

Answer 22

The average amount saved out of total income.

Question 23

What is the formula for MPS?

Answer 23

MPS = $\frac{\text{change in savings}}{\text{change in income}}$

Question 24

What is the formula for APS?

Answer 24

APS = $\frac{\text{total savings}}{\text{total income}}$

Question 25

How do interest rates influence consumer spending?

Answer 25

High interest rates increase the cost of borrowing, reducing consumption.

Question 26

What is the 'wealth effect'?

Answer 26

A change in consumption following a change in wealth.

Question 27

How does the distribution of income affect consumption?

Answer 27

Moving money from the rich to the poor is likely to increase consumption.

Question 28

What is investment in economics?

Answer 28

The addition of capital stock to the economy.

Question 29

What is the difference between gross and net investment?

Answer 29

Gross investment ignores depreciation; net investment subtracts depreciation.

Question 30

How does the rate of economic growth influence investment?

Answer 30

A growing economy leads to higher levels of investment.

Question 31

What are 'animal spirits' in the context of investment?

Answer 31

The feeling of managers and owners of firms on whether their investment would be profitable.

Question 32

How do interest rates influence investment?

Answer 32

High interest rates make borrowing more expensive, reducing investment.

Question 33

How can governments encourage investment?

Answer 33

By offering tax breaks or grants to businesses.

Question 34

What is retained profit?

Answer 34

The profits kept by a firm and not shared with shareholders or used to pay taxes.

Question 35

How does technological change influence investment?

Answer 35

Improvements in technology improve or speed up production, making investment attractive.

Question 36

How does the trade cycle influence government expenditure?

Answer 36

In a recession, governments may increase spending; during booms, they may decrease spending.

Question 37

What is fiscal policy?

Answer 37

Decisions about government spending and taxes.

Question 38

How does the age distribution of the population influence government expenditure?

Answer 38

An ageing population increases spending on pensions, social care, etc.

Question 39

What is net trade?

Answer 39

Total exports minus total imports.

Question 40

How does real income influence net trade?

Answer 40

High real income tends to increase imports, decreasing net trade.

Question 41

How do exchange rates influence net trade?

Answer 41

A strong pound makes imports cheap and exports dear, decreasing net trade.

Question 42

What is protectionism?

Answer 42

An attempt to prevent domestic producers suffering from competition abroad.

Question 43

Give examples of protectionist measures.

Answer 43

Tariffs, quotas, and technical barriers.

Question 44

How do non-price factors affect net trade?

Answer 44

Higher quality, design and marketing can increase exports and decrease imports.

Question 45

How do prices influence net trade?

Answer 45

High prices of UK goods can make them less competitive, decreasing exports and increasing imports.