Aggregate Demand

Question 1

What does the Aggregate Demand (AD) curve show?

Answer 1

The AD curve shows the relationship between the level of real planned expenditure and the general price level in an economy.

Question 2

What is the formula for Aggregate Demand?

Answer 2

AD = C + I + G + X - M

Question 3

What happens to AD when the general price level falls?

Answer 3

A fall in the general price level causes an extension of AD, resulting in higher real income.

Question 4

What happens to AD when the general price level rises?

Answer 4

A rise in the general price level causes a contraction of AD resulting in lower real income.

Question 5

Why is the relationship between price level and AD inverse?

Answer 5

The relationship is inverse due to the real income effect, balance of trade effect and interest rate effect.

Question 6

What is the real income effect?

Answer 6

As the price level falls, the real value of income rises, allowing consumers to buy more, thus increasing consumption.

Question 7

What is the balance of trade effect?

Answer 7

A fall in the relative price level can make foreign-produced goods more expensive, leading to a rise in exports and a fall in imports.

Question 8

What is the interest rate effect?

Answer 8

Low price inflation may lead to reduced interest rates, increasing consumption and improving net exports.

Question 9

What does a rightward shift in the AD curve indicate?

Answer 9

A rightward shift indicates an increase in AD due to factors other than a change in the price level.

Question 10

What does a leftward shift in the AD curve indicate?

Answer 10

A leftward shift indicates a decrease in AD due to factors other than a change in the price level.

Question 11

What factors can shift the AD curve?

Answer 11

Factors include changes in real income, consumer and business confidence, household wealth, monetary policy, fiscal policy and exchange rates.

Question 12

What is the wealth effect?

Answer 12

When asset prices increase, people feel wealthier and are more likely to spend rather than save.

Question 13

What is the role of monetary policy in AD?

Answer 13

Lower interest rates make borrowing cheaper, encouraging spending and investment.

Question 14

How does fiscal policy influence AD?

Answer 14

Government spending and tax cuts can increase consumption and investment, boosting AD.

Question 15

What is the paradox of thrift?

Answer 15

The paradox of thrift states that an increase in saving can lead to a decrease in economic activity and overall saving.

Question 16

What is investment in the context of AD?

Answer 16

Investment refers to the addition to the capital stock of the economy, such as factories and equipment.

Question 17

What is the difference between gross and net investment?

Answer 17

Gross investment is total investment before depreciation, while net investment is gross investment minus depreciation.

Question 18

What factors influence investment?

Answer 18

Factors include interest rates, availability of finance, demand for final products, business confidence, corporate taxes,and technological change.

Question 19

How does investment impact AD?

Answer 19

Investment adds to aggregate demand, causing short-run growth and influencing long-run aggregate supply.

Question 20

What is the significance of consumer confidence?

Answer 20

High consumer confidence leads to increased spending, boosting AD.

Question 21

What is the average propensity to consume (APC)?

Answer 21

APC = C/Y, where C is consumption and Y is national income.

Question 22

What is the marginal propensity to consume (MPC)?

Answer 22

MPC = change in C/change in Y, indicating how consumption changes with income.

Question 23

What is the average propensity to save (APS)?

Answer 23

Proportion of total income that is saved

APS = S/Y, where S is saving and Y is national income.

Question 24

What is the marginal propensity to save (MPS)?

Answer 24

MPS = change in S/change in Y, indicating how saving changes with income.

Question 25

What is government consumption?

Answer 25

The **day-to-day running costs of government, including wages to public sector workers and energy bills for government offices. ** ## Footnote Also known as current spending by the government.

Question 26

What does government consumption not include?

Answer 26

**Transfer payments such as government spending on welfare benefits or pensions, as these are transfers of income from taxpayers to other groups.**

Question 27

What is central government?

Answer 27

**Government run at Westminster**.

Question 28

What is local government?

Answer 28

**Local councils, county councils, and city mayors.**

Question 29

What components make up aggregate demand?

Answer 29

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

Question 30

How does government spending change during an economic downturn?

Answer 30

**Government spending increases on welfare benefits and support for businesses**, *known as cyclical government spending.*

Question 31

What is discretionary government spending?

Answer 31

Changes to **government spending unrelated to the economic cycle**, such as those made in the Budget.

Question 32

What is net trade (X-M)?

Answer 32

The **value of exports less the value of imports.**

Question 33

What is the role of government spending in fiscal policy?

Answer 33

It can **change the level of aggregate demand, provide public goods, correct market failures, influence economic regions, and achieve greater equity in society.**

Question 34

What is a budget deficit?

Answer 34

**When government spending exceeds tax revenue** (G>T), leading to **borrowing to fund spending.**

Question 35

What is a budget surplus?

Answer 35

When **government spending is less than tax revenue (G

Question 36

What is a balanced budget?

Answer 36

When **government spending equals tax revenue** (G=T).

Question 37

What is the fiscal multiplier?

Answer 37

Estimates the **final change in real national income** (GDP) **resulting from an initial change in government spending plans.**

Question 38

What is a trade surplus?

Answer 38

When **net export demand is positive, adding to aggregate demand.**

Question 39

What is a trade deficit?

Answer 39

When **net export demand is negative, reducing aggregate demand.**

Question 40

What is trade balance equilibrium?

Answer 40

When the **value of exports equals the value of imports**, resulting in neutral net export demand.

Question 41

What factors influence net trade?

Answer 41

**Real income**, **exchange rate**, **state of the global economy**, **degree of protectionism**, **non-price competitiveness, and price competitiveness.**

Question 42

How does real income affect net trade?

Answer 42

**Increasing domestic incomes can reduce exports and increase imports**, while increasing incomes abroad may boost exports.

Question 43

How does the exchange rate affect net trade?

Answer 43

A **depreciation makes imports more expensive and exports cheaper**, potentially increasing net trade unless price elasticity is low.

Question 44

How does the state of the global economy influence net trade?

Answer 44

**Strong global growth may increase demand for exports**.

Question 45

How does protectionism affect net trade?

Answer 45

If other countries **reduce tariffs and non-tariff barriers, net trade may rise.**

Question 46

What is non-price competitiveness?

Answer 46

**Improvements in quality, design, speed of delivery, and after-sales service** that can increase net trade.

Question 47

What is price competitiveness?

Answer 47

**Improvements that make a country's products better value for money**, potentially increasing net trade.