Topic 10: Macroeconomic Models

Question 1

Explain Aggregate Demand (AD)

Answer 1

Aggregate Demand refers to the total demand for all goods and services produced by a country for a given price level (GPL), where components are C, I, G and (X-M). It shows the amount of domestically produced goods and services which households, firms, government and foreigners are willing to buy at each general price level.

Question 2

Why does the AD curve slope downwards?

Answer 2

(Starting point for all 3 - General Price Level (GPL) increases)
Wealth Effect - real value (purchasing power decreases)
Interest Rate Effect - DD of $ increases -> Interest Rate increases
Foreign-sector effect/International substitution effect - local prices>foreign prices

Question 3

Explain the non-price AD determinant, C

Answer 3

C (Consumption Expenditure)
Consumption Expenditure is the amount that households spend out of their disposable income on consumer goods and services to satisfy current wants

Question 4

Explain Induced Consumption

Answer 4

Consumption expenditure that varies directly with income

Question 5

Explain autonomous consumption

Answer 5

Consumption expenditure that does not vary with income. It changes when there are changes to non-income factors.