THEME 2, Aggregate demand (2.2)

Question 1

How is Aggregate Demand calculated?

Answer 1

Consumption + Investment + GOVt spending (exports-imports)

Question 2

What is consumption?

Answer 2

Spending on goods and services by households for private consumption

Question 3

What is Investment?

Answer 3

Spending on goods that make other goods.. By businesses

Question 4

What are exports?

Answer 4

• Goods + Services made in the UK to be sold to overseas customers
• This includes the tourism as for example a French man will use services in London, money will end up in the UK not France

Question 5

What are imports?

Answer 5

Foreign goods + services bought by UK citizens

Question 6

What are factors that change the level of household saving?

Answer 6

• Real interest rate
• Price expectations
• Availability of credit
• Unemployment / job security
• Consumer confidence and expectations
• Taxation of savings
• Trust in savings institutions

Question 7

What is the biggest component of aggregate demand?

Answer 7

Consumption

Question 8

What percentage of AD was consumption in 2019 and 2020?

Answer 8

• 2019 - 63%
• 2020 - 60%

Question 9

How is aggregate demand measured?

Answer 9

• Quarterly

Question 10

How does increasing consumer confidence affect aggregate demand?

Answer 10

• Increasing consumer confidence means that consumer spending will increase.
• People are more confident when jobs are secure and price expectations are normal
• Increase demand for goods and services hence AD increases

Question 11

How do interest rates affect aggregate demand?

Answer 11

• If there are lower interest rates then people with a mortgage will pay less monthly
• More money to consume goods and services

Question 12

How does GOVt spending affect aggregate demand?

Answer 12

When GOVt spending increases this increases economic activity, which increases AD,

Question 13

How do exchange rates affect AD?

Answer 13

• When the value of the pound (£) falls:
• Importing items becomes more expensive
• Exporting items becomes cheaper
• This would cause volume of exports to rise which would positively impact AD

Question 14

What is aggregate demand?

Answer 14

The total demand for all finished goods and services produced in an economy.

Question 15

What is on the X and Y axis of a aggregate demand curve diagram?

Answer 15

• X axis - Real GDP (RNO)
• Y axis - Price level

Question 16

What is RNO?

Answer 16

Real National Output

Question 17

Why does GOVt spending change?

Answer 17

• Employment
• State of the world (e.g. Covid or Wars)
• Ideology (Left wing favours public sectors whereas right wing favours private sectors)

Question 18

What does the AD curve show?

Answer 18

The relationship between the price level and the equilibrium level of real income and output.

Question 19

What does a change in price level result on an AD curve?

Answer 19

Movement along the AD curve

Question 20

What do higher prices lead to in Aggregate demand?

Answer 20

Higher prices lead to falls in aggregate demand

Question 21

When do shifts occur in the AD curve?

Answer 21

If there is a change in any relevant variable apart from price levels

Question 22

Give me an example of a real variable, in the context of an AD curve.

Answer 22

Willingness of consumers to spend

Question 23

Give me an example of a monetary variable, in the context of an AD curve.

Answer 23

Rate of interest

Question 24

What does aggregate mean?

Answer 24

The sum or total

Question 25

What is the aggregate demand curve?

Answer 25

* Shows the relationship between the price level and equilibrium national income. * As the price level rises the equilibrium level of national income falls

Question 26

What is the definition of investment?

Answer 26

* The addition of capital stock to the economy. * It is only seen as investment if real products are created so buying a share in a company would be saving but buying new machinery is investment.

Question 27

What is net investment?

Answer 27

* Gross investment minus the value of depreciation

Question 28

What is gross investment?

Answer 28

* Amount of investment carried out and ignores the level of depreciation

Question 29

What influences investment?

Answer 29

* Rate of economic growth * Animal spirits * Demand for exports * Interest rates * Influence of GOVt regulations * Access to credit * Technological change * Costs

Question 30

What are Keynesian animal spirits?

Answer 30

* Keynesian animal spirits refer to the non-rational, emotional factors that influence economic behaviour and decision-making.

Question 31

What happens when animal spirits are high?

Answer 31

* When animal spirits are high, people tend to be more confident, and willing to invest or spend money * Leads to increased economic activity and growth.

Question 32

What happens when animal spirits are low?

Answer 32

* When animal spirits are low, people may become more cautious and reluctant to invest or spend, * Potentially leading to economic downturns or stagnation.

Question 33

How does demand for exports affect investment?

Answer 33

* If world economy is booming demand for exports will increase... * Exporting firms' investment is likely to increase to cope w/ extra demand

Question 34

How do interest rates affect investment?

Answer 34

* If there are high interest rates it is more expensive to borrow money * Businesses will be more cautious to ensure profits can cover interest rates * Investment will go down if there are high interest rates.

Question 35

What influences net-trade balance?

Answer 35

* Real income * Exchange rates * State of global economy * Degree of protectionism * Non-price factors * Prices