Aggregate Demand

Question 1

What is AD

Answer 1

AD is the total demand for a countries goods and services at a given price level

Question 2

What is the equation for AD

Answer 2

C+I+G(X-M)

Question 3

How does AD change

Answer 3

AD changes if one of the factors within AD (equation) changes

Question 4

What is the wealth effect

Answer 4

as the price level falls, purchasing power rises which causes an expansion in AD

Question 5

What is the trade effect

Answer 5

The trade effect could be the rise in domestic prices, causing exports to be less competitive and imports to be more competitive, making exports fall and imports rise. Both of these reactions join to create the trade effect which in this instance is lower AD and high prices. (The opposite can happen with imports becoming less competitive leading to higher AD)

Question 6

What is the interest effect

Answer 6

interest rates change due to a change in price levels, when interest rates change so does AD.
higher I.R = lower AD and vice versa

Question 7

Name one way consumption affects AD

Answer 7

The level of real disposable income affects how big AD is

Question 8

Name another way consumption affects AD

Answer 8

interest rates and the availability of credit: if interest rates are cut, it could cause more borrowing and more disposable income increasing the MPC. Availability of credit is also important, if the availability of credit is very low, banks will not be willing to lend, reducing the impact of a cut to interest rates.

Question 9

Name a third way consumption affects AD

Answer 9

Consumer Confidence, this affects consumption and AD as a whole

Question 10

Name a fourth way consumption affects AD

Answer 10

Asset prices, these are linked to wealth and if they go up, people will become wealthier and may contribute to AD

Question 11

Name a fifth way consumption affects AD

Answer 11

household indebtness, if there is a huge amount of household indebtness in the economy, families are more likely to save than spend

Question 12

Name the three types of government spending that can take place

Answer 12

current spending, capital spending, welfare spending

Question 13

What is current spending

Answer 13

spending on maintenance for key public sector services and wages e.g. NHS

Question 14

What is capital spending

Answer 14

infrastructure projects e.g. building roads, hospitals and schools

Question 15

What is welfare spending

Answer 15

benefits and pensions

Question 16

What is the fourth type of government spending

Answer 16

Debt interest payments

Question 17

What is debt interest payments

Answer 17

paying off debt with interest to other countries

Question 18

What is a budget deficit

Answer 18

this is when government spending is greater than taxation revenues in a fiscal year

Question 19

What is national debt

Answer 19

Total stock of debt over time, accumulation of budget deficits

Question 20

What is the definition of investment in economics

Answer 20

The addition to capital stock of the economy e.g. factories, machinery, offices

Question 21

What is gross investment

Answer 21

measures the total investment before depreciation

Question 22

What is net investment

Answer 22

measures gross investment minus the value of depreciation

Question 23

How much of UK investment is replacing capital stock every year

Answer 23

75%

Question 24

Name some examples of the investment into the UK

Answer 24

• robotics
• machine tools
• infrastructure
• software
• logistics equipment

Question 25

How does the accelerator theory relate to investment

Answer 25

The faster the pace of economic growth, the sooner capital equipment will wear out or require replacement, so investment increases to meet the demand. When the economy is expanding, investment increases and vice versa

Question 26

How does demand expectations and confidence relate to investment

Answer 26

if firms are confident that consumption will increase, they are more likely to invest

Question 27

How do ‘animal spirits’ affect investment

Answer 27

‘animal spirits’ refers to the collective mood of investors, when this is strong AD increases leading to higher investment

Question 28

How do exports influence investment

Answer 28

higher demand for exports will lead to more investment in capital assets in order to increase capacity to meet demand

Question 29

How do interest rates affect investment

Answer 29

lower interest rates make investment projects less costly and normally help to stimulate investment

Question 30

How can investment be influenced by government regulations

Answer 30

Businesses may be abler to take advantage of government grants to compliment their own investment

Question 31

What is X - M

Answer 31

net exports

Question 32

What is one determinant of net exports

Answer 32

real disposable income earned abroad, if people abroad have higher incomes, their MPM increases, which increase UK X shifting AD right

Question 33

What is a second determinant of net exports

Answer 33

real disposable income earned at home, if there is a boom in the UK, the UK MPM is likely to rise which causes the sucking in effect of imports shifting AD left

Question 34

What is a third determinant of net exports

Answer 34

strong or weak exchange rates (SPICED, WPIDEC) if you have a strong exchange rate, this would cause higher MPM shifting AD left, WPIDEC is the opposite of this.

Question 35

What is a fourth determinant of net exports

Answer 35

Protectionism at home or abroad (tariffs, quotas, sanctions) at home this would reduce X revenue shifting AD left, the opposite would happen with high tariffs from the UK.

Question 36

What is a fifth determinant of net exports

Answer 36

relative inflation levels at home, if inflation in the UK is higher than other countries especially UK trading partners, UK X will be less competitive shifting AD left