Aggregate Demand

Question 1

What is Aggregate Demand?

Answer 1

• Total spending on Goods and Services in an economy over a period of time.
• AD=GDP

Question 2

What is Consumption?

Answer 2

• Spending on Goods and Services.

Question 3

What is the Gross Domestic Fixed Capital Formation?

Answer 3

• Investment spending on assets used over a number of years to produce goods and services.
• Includes spending on capital goods and on working capital.
• Net investment includes depreciation. Gross investment doesn’t.

Question 4

What is Government Spending?

Answer 4

• Spending on publicly provided goods and services.

Question 5

What are exports?

Answer 5

• UK output sold abroad.

Question 6

What are imports?

Answer 6

• Foreign output purchased by UK.

Question 7

What are the proportions in the UK for aggregate demand?

Answer 7

• Consumption, 61 percent
• Investment, 15 percent
• Government spending, 25 percent
• Net Exports, -1 percent.

Question 8

What are the two axis on the Aggregate Demand Curve?

Answer 8

• Price level.
• Real national output.

Question 9

What do the two axis on the aggregate demand curve mean?

Answer 9

• Price level - the average prices for all goods and services in an economy. i:e: its inflation.
• Real National Output - the output of the economy taking into account inflation.

Question 10

What are the reasons of the downward sloping curve?

Answer 10

• At higher prices, total demand decreases.
• As P level increases, UK goods become less competitive = decrease in X, increase in M (international effect).
• Real balance effect - As P level rises, the real value of income falls - consumers, govt, business able to buy what they want or need.
• As Interest Rate, as P level rises, the Bank of England will raise the interest rate which will reduce consumption and investment.

Question 11

What will the changes in the price level do to the AD curve?

Answer 11

• It will cause movements.

Question 12

What are the causes of shifts in the AD Curve?

Answer 12

• Changes in the components of AD.

Question 13

What does a rise in the price level do to the aggregate demand?

Answer 13

• Contracts it.

Question 14

What does a rise in the price level do to the aggregate demand?

Answer 14

• Expands it.

Question 15

What the the general things to consider regarding AD?

Answer 15

• C is the biggest component and therefore has the biggest effect on short run changes in real GDP.
• I is the most volatile, but has huge impacts on the economy.
• Changes in AD occur as a natural part of the economic cycle.