Aggregate demand

Question 1

What is the definition of AD

Answer 1

Aggregate demand (AD) is the total demand for all goods/services in an economy at any given average price level

Question 2

What are the percentages of each component in UK AD

Answer 2

Consumption = 60%; Investment = 14%; Government spending = 25$; Exports - imports = 1%

Question 3

What is net investment

Answer 3

Gross investment - depreciation

Question 4

What is disposable income

Answer 4

Income left over after paying taxes

Question 5

What does the multiplier ratio tell us

Answer 5

How much GDP will increase in total following an initial injection into the economy

Question 6

What are the forumlas for the multiplier ratio

Answer 6

1/(1-MPC); 1/MPW; 1/(MPM+MPT+MPS)

Question 7

What is MPC

Answer 7

How likely consumers are to spend an additional £.

Question 8

What is the multiplier effect

Answer 8

When an initial injection of spending creates a larger final increase in national income.

Question 9

What is the opposite of the multiplier effect

Answer 9

The downwards multiplier effect

Question 10

What is a transfer payment

Answer 10

A payment by the government for which no goods or services are recieved

Question 11

What causes changes in consumer spending

Answer 11

Intrest rates; Mortgages; Investment; Consumer confidence; Wealth effect; Pensions; Savings ratio

Question 12

What is the definition of intrest

Answer 12

The cost of borrowing and the reward for saving

Question 13

What causes changes in investment

Answer 13

Intrest rates; Animal spirits; Demand for exports; Economic growth; Regulation

Question 14

What is the wealth effect

Answer 14

When an increase in wealth caused by an increase in house prices makes consumers feel more confident

Question 15

What is the criticism of the wealth effect

Answer 15

When house prices increase, the people who do not yet own a home have to save even more money to get on the property ladder, decreasing their consumption.

Question 16

What is the savings ratio

Answer 16

The percentage of disposable income that consumers will save

Question 17

What is the savings ratio forumla

Answer 17

(Savings / Disposable income) x 100