Aggregate Demand And Index Numbers

Question 1

Index numbers do….

Answer 1

-allow for quick and easy data comparison, they make ugly numbers less ugly

Question 2

How to work out/do an index number

Answer 2

(Raw number divided by base raw number) X100
-the differences in percentage between these numbers allow us to see how an economy is preforming or whatever’s economic metric is being used

Question 3

Aggregate demand

Answer 3

The total demand for a countries goods and services at a given price level in a given time period
-AD down sloping is purely because of price level changing

Question 4

AD equation of

Answer 4

AD=C+I+G+(X-M)
-c= wealth effect
-(x-m) =trade effect
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Question 5

Wealth effect

Answer 5

-wealth effect says that as the price level decreases, the purchasing power of income increases
-people are richer and are more likely to spend money on goods and services which will increase consumption (c)

Question 6

Trade effect

Answer 6

-trade effect says as the price level decreases, exports become more competitive and imports become less
-exports becoming more competitive, there will be a greater demand and revenue will increase, this increases X
-imports become less competitive because domestic businesses and services are more competitive , less spenditure on imports means that it reduces the value of M
-change in price level means that the value of (X-M) will increase, aggregate demand will increase which means real GDP will increase

Question 7

Interest effect

Answer 7

-as the price level decreases, interest rates can kept lower in the economy because most banks will adopt interest rate policy to meet inflation target
-low interest rates being able to kept lower, stimulate high consumption, stimulate high investment as cost of borrowing is lower, reduces the value of the exchange rate which can then boost export performances
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