Aggregate Demand

Question 1

What is consumption?

Answer 1

The total amount spent by households on goods/services.

Question 2

What is Aggregate Demand and it’s formula?

Answer 2

The total demand/spending in an economy over a period of time

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

Question 3

What factors effect Consumption and saving?

Answer 3

Income - as it increases, so does consumption - consumption rises slower than income as people save more as well.

Interest rates - higher interest rates, less consumption.

Consumer confidence - more confident, spend more

Taxes - direct taxes like VAT increasing leads to decrease in consumer expenditure.

Question 4

What is investment?

Answer 4

Money spend by firms on Assets which they’ll use to produce goods/services

Question 5

What factors affect investment?

Answer 5

Business confidence
Interest rates - high = low 
Risk - high risk = low
Technical advances 
Incentives/regulation

Question 6

What does government spending not include?

Answer 6

Benefits/pensions

Question 7

What factors effect imports/exports?

Answer 7

Exchange rate: Long run - if it increases, imports become cheaper and exports more expensive for foreigners. As a result, X and M will fall as demand decreases.

Short run - demand is inelastic - so some goods don’t have substituted straight away - this means as currency increases the value of exports increase and imports decrease

Non price factors - quality of goods - higher quality goods = more exports.