AD ( 1 )

Question 1

What is aggregate demand?

Answer 1

• Total demand, or the total spending in an economy over a given period of time.
• Measures the spending on goods and services by consumers, firms, the government and overseas consumers and firms.
• Aggregate demand is the total demand in the economy. It measures spending on goods and
services by consumers, firms, the government and overseas consumers and firms.

Question 2

What is the AD formula?

Answer 2

C + I + G + ( X - M )

Question 3

What are the determinants/components of AD?

Answer 3

• Consumer Expenditure
• Investment
• Government Expenditure
• Net Exports ( Exports & Imports )

Question 4

What is consumption?

Answer 4

The total amount spent spent by households on goods and services, does not include firm expenditure

Question 5

How does consumption affect AD?

Answer 5

• An increase in consumption will mean an increase in AD.

* A reduction in consumption will result in a reduced AD.

Question 6

How are savings and consumption related?

Answer 6

• When consumption is high, saving tends to be low.

* High saving = Low Consumption.

Question 7

What is disposable income?

Answer 7

Disposable income is the amount of income consumers have left over after taxes
and social security charges have been removed. It is what consumers can choose to
spend.

Question 8

What are the various factors affecting consumption/saving?

Answer 8

• Income
• Interest Rates
• Consumer Confidence
• Wealth Effects
• Taxes
• Unemployment

Question 9

How does income affect consumption?

Answer 9

• As income increases, the consumption will rise.
• The rate at which consumption rises is usually lower than the rate at which income increases, because households tend to save more money

Question 10

How do interest rates affect consumption?

Answer 10

• Higher interest rates lead to lower consumer spending, Consumers will save more to take advantage of higher rates, but also less likely to borrow money or buy things on credit because it is more expensive.
• Consumers may have less money to spend if interest rates on existing loans/mortgages increases.
—–
• Lower interest rates lower the cost of debt, this may encourage borrowing increasing consumer expenditure, also increases disposable income of households
• Lower incentive to save, consumer expenditure will be increases.

Question 11

Why are interest rates not suitable for a fast gain in AD?

Answer 11

Time lags between change in interest rate and rise in AD.

Question 12

How does consumer confidence affect consumer expenditure?

Answer 12

• Greater consumer confidence about the economy, and their own financial situation, the more they spend, and the less they save.
• Low confidence encourages saving, reducing consumer expenditure.

Question 13

How does wealth affect consumer expenditure?

Answer 13

• A rise in household wealth will lead to a rise in consumer spending, and a reduction in savings.
• This occurs because consumer confidence will increase.
• If house prices rise faster than inflation, home owners will feel confident in their own finances.

Question 14

How do taxes affect consumer expenditure?

Answer 14

• Direct tax increases lead to a fall in disposable income, so they spend less
• If indirect taxes increase ( VAT ), consumers will reduce their consumption.
A reduction in indirect taxes/direct taxes will lead to an increase in consumer spending.

Question 15

How does unemployment affect consumer expenditure?

Answer 15

• When unemployment rises, consumers tend to spend less and save more.
• People in employment will save more, as consumer confidence falls ( fear of losing job )
• Fall in unemployment means more people have money to spend, and consumers are less worried about losing their jobs, so consumer spending increases.

Question 16

What is the difference between investment and saving?

Answer 16

• Savings are made by households

* Investments are made by firms.