Aggregate Demand

Question 1

Define aggregate demand…..

Answer 1

Total spending in the economy

Sum of all market demand curves

Question 2

Aggregated demand is the sum of….?

Answer 2

Consumption spending

Investments

Government Spending

Net Exports (Net Imports would be subtracted)

Question 3

What is consumption spending?

Answer 3

Spending by individuals on goods and services

• Does not include new housing
• Accounts for 70% of aggregate US Spending
• Primarily determined by personal disposable income (PDI)

Question 4

What is consumption function?

Answer 4

Measures the relationship between disposable (PDI) and consumption spending (CS)

• IF CS > PDI = Borrowing (going into debt)
• IF CS < PDI = Savings

Question 5

What is average propensity to consume (APC)

Answer 5

Measures the percent of disposable income spent on consumption

Question 6

What is average propensity to save (APC)

Answer 6

Percentage of savings

Question 7

What is marginal propensity to consume? (MPC)

Answer 7

Measures the change in consumption spending as a percent of the change in disposable income

• if $1.00 of additional disposable income is received and .90 is spent on consumable goods, MPC = 90%

Question 8

Does MPC + MPS = 100% ?

Answer 8

TRUE!!

Question 9

What is investment spending?

Answer 9

Spending on capital items:

• Residential construction
• Non-residential
• PPE
• Inventory

Accounts for 15% of spending in the US

Question 10

What factors influence investment spending?

Answer 10

• Interest rates (most significant)
• Demographics
• Consumer confidence
• Level of capacity utilization
• Technological
• Vacancy rates
• Current and expected level of sales

Question 11

What is government spending?

Answer 11

Purchase of goods and services by all levels of government

• Does not include transfer payments (SS, Medicare, etc)

Question 12

Changes in government spending, what happens…?

Answer 12

TAXES INCREASE OR DECREASE. LESSENS PERSONAL CONSUMPTION

Question 13

Define exports?

Answer 13

Amount of foreign spending on US Goods

Question 14

If exports are greater than imports, what happens to aggregate demand?

Answer 14

INCREASES AGGREGATE DEMAND

Question 15

What is a change in aggregate demand?

Answer 15

Shift in aggregate demand curve
- Factors other than price changes

Examples:
- OUTWARD SHIFT (INCREASE): Reduction in taxes, improve consumer confidence, new tech in investment, interest rate declines, government spending increases, export increases, increases in wealth (stock market gains)

• INWARD SHIFT (DECREASE): Increase in tax, consumer confidence declines, etc

Question 16

What is the multiplier effect?

Answer 16

Increased demand has a ripple effect throughout the entire economy.

Example: Increased investment spending = more personal income = more consumption spending

Question 17

What is the multiplier effect formula? (if investment spending increased, this formula gives you the impact on demand).

Answer 17

Change in spending X (1/1-MPC)