27 Aggregate demand

Question 1

Aggregate demand

Answer 1

AD=C+I+G+(X-M)
AD = the ability and willingness of all economic agents to spend in the economy
C = spending by households on goods and services
I = spending by firms on goods and services to be used in future education
G = spending by the government on goods and services
Net exports - exports - imports

Question 2

Shifts in AD

Answer 2

Consumption - increase tax or people saving rather than spending decreases consumption
Investment - firms invest to increase ability to produce goods and services - depends on confidence and gov incentives
Government expenditure- depends on the objectives of the government and level of government intervention
Net exports - imports are greater than exports decreases AD vice versa

Question 3

Relationship between income and consumption

Answer 3

• spend less than income - leakages of saving
• spend more than income - past savings or borrowing
• low-income households are likely to have high propensity to consume as they use most if not all on necessities
• high-income households are likely to have low propensity to consume as they have money left over after purchasing necessities