Aggregate Demand

Question 1

What is the Equation for AD?

Answer 1

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

Question 2

What is the largest component and smallest component?

Answer 2

• Consumption 65%
• Govt spending 22.5%
• Public and Private sector investment just under 15%

Question 3

What is the Wealth Effect?

Answer 3

• Changes in PL affect real value of peoples wealth
• If PL increases, real value of wealth falls
• People cut back on spending

Question 4

What is the International Trade Effect?

Answer 4

• If domestic PL rises and other countries PL stays the same exports become more expensive
• We import more therefore trade deficit

Question 5

What is the interest rate effect?

Answer 5

• increase in PL would mean ppl need to borrow more to afford shit
• Increase in demand for money and therefore increase in interest rate
• Decrease in borrowing

Question 6

How does change in consumer confidence affect consumption?

Answer 6

• If consumer expect income rise they are optimistic to spend more
• Low consumer confidence due to fears, e.g cuts in wages, leads to less spending

Question 7

How do change in interest rates affect AD?

Answer 7

• Spending is influenced by this

- don’t be a spastic

Question 8

How do changes in wealth affect AD?

Answer 8

• Increase in consumer wealth makes them feel wealthier

- Likely to spend more

Question 9

How do changes in personal income taxes affect AD?

Answer 9

• If government increase personal income tax then less disposable income
• Spending drops

Question 10

Changes of household levels of indebtedness

Answer 10

• more debt people are likely to cut back on spending

Question 11

What is the difference between gross investment and net investment?

Answer 11

• Gross investment is before capital depreciation

- Net investment is gross investment - the value of depreciation

Question 12

How does business confidence affect AD?

Answer 12

• More confidence in future will mean more investment

Question 13

How do changes in interest rates affect AD?

Answer 13

• Raise cost or lower cost of borrowing, determining factor of investment

Question 14

How do improvements in technology affect AD?

Answer 14

• New tech stimulates investment and increases AD

Question 15

How does level of corporate indebtedness affect AD?

Answer 15

• More debt means they are less inclined to buy/borrow anything

Question 16

How do legal changes affect AD?

Answer 16

• Change the way businesses invest