Lesson 4 - Aggregate Demand

Question 1

What is aggregate demand?

Answer 1

Total spending on all goods and services in an economy at any given price level

Question 2

What are the 4 components of AD?

Answer 2

Consumption, investment, government spending, next exports

Question 3

What is the equation for AD?

Answer 3

AD = gov spending + investment + consumption + (exports - imports)

Question 4

What is investment?

Answer 4

Spending on capital by firms

Question 5

What incentivises firms to invest?

Answer 5

• high profits
• high prices

Question 6

Describe the multiplier effect

Answer 6

• any injection/change to a component of AD will have an every greater change to the economy

Question 7

What does the multiplier effect size depend on?

Answer 7

How big the leakages are - lower leakages = the injection can go around more times

Question 8

What is the formula for the multiplier effect?

Answer 8

1 / (1- MPC) OR 1/MPS

Question 9

What is the accelerator effect?

Answer 9

The idea that when we get growth and consumption increases, the increase in profits encourages firms to invest, which leads to more growth

Question 10

What shifts the AD curve?

Answer 10

• changes in interest rates
• a cut on direct taxes (taxes on income/profits)
• fall in the exchange rate
• a rise in confidence
• inflationary expectations
• availability of credit (how easy it is to borrow)
• advances in technology