Aggregate Demand and the AD Curve
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Questions and Answers

What does aggregate demand (AD) represent in an economy?

  • The total supply of goods and services at different price levels
  • The total money supply in an economy
  • The total revenue of all businesses in a given period
  • The total spending on domestic goods and services at different price levels (correct)

Which of the following is NOT a component of aggregate demand?

  • Net exports (X - M)
  • Government spending (G)
  • Savings (S) (correct)
  • Consumption (C)

Why is the aggregate demand curve downward sloping?

  • A higher price level reduces purchasing power and net exports (correct)
  • A higher price level always leads to more demand
  • A higher price level increases consumer purchasing power
  • A higher price level reduces real wealth, increasing demand

What causes a movement along the AD curve rather than a shift?

<p>Changes in the price level (A)</p> Signup and view all the answers

Which of the following will cause a rightward shift in the AD curve?

<p>A decrease in income tax (A)</p> Signup and view all the answers

What is the likely effect of a significant increase in business confidence?

<p>An increase in investment spending, shifting AD to the right (D)</p> Signup and view all the answers

Which of the following would shift AD to the left?

<p>The government cuts military spending (D)</p> Signup and view all the answers

If the domestic currency depreciates, how does it affect AD?

<p>Net exports increase, shifting AD to the right (C)</p> Signup and view all the answers

How would a recession in a major trading partner country affect domestic AD?

<p>AD shifts to the left because exports decrease (A)</p> Signup and view all the answers

If the central bank increases interest rates, what is the likely impact on AD?

<p>AD shifts to the left as borrowing becomes more expensive (D)</p> Signup and view all the answers

If inflation in an economy rises significantly, how does it affect AD?

<p>AD shifts left as purchasing power declines (D)</p> Signup and view all the answers

Which policy would most effectively increase AD in a recession?

<p>Lowering interest rates and increasing government spending (D)</p> Signup and view all the answers

If the government increases subsidies for businesses, what will likely happen to AD?

<p>AD will shift right as investment increases (C)</p> Signup and view all the answers

Flashcards

Aggregate Demand (AD)

Total spending on domestic goods and services at different price levels.

Components of AD

Consumption, Investment, Government Spending, and Net Exports.

Downward Sloping AD Curve

AD curve slopes downward because higher price levels reduce purchasing power.

Movement along AD Curve

Caused by changes in the price level.

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Shift in AD Curve

Occurs due to changes in components of AD other than price level.

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Consumption (C)

Total spending by households on goods and services.

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Government Spending (G)

Total expenditure by the government on goods and services.

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Net Exports (X-M)

Exports minus imports, contributing to AD.

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Impact of Lower Income Tax

Increases disposable income, shifting AD curve to the right.

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Effect of Increased Business Confidence

Boosts investment spending, shifting AD to the right.

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Impact of Government Spending Cuts

Reduces AD and shifts the curve to the left.

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Effect of Currency Depreciation

Increases net exports, shifting AD to the right.

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Recession Abroad

Decreases demand for exports, shifting AD to the left.

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Rising Interest Rates

Likely shifts AD to the left as borrowing costs increase.

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Effect of Higher Inflation

Shifts AD to the left as real purchasing power declines.

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Increasing Government Subsidies

Encourages investment and shifts AD to the right.

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Impact of Lower Interest Rates

Shifts AD to the right by making borrowing cheaper.

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Consumer Confidence

Affects consumption and thus AD significantly.

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Investment (I)

Total spending on capital goods increasing future production.

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Impact of Government Regulations

Can affect business costs and therefore AD.

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Foreign Income Effect

Foreign income levels can influence domestic AD based on exports.

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Expectations of Economic Growth

Can drive investment and shift AD to the right.

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Effects of Automatic Stabilizers

Mechanisms like taxes and welfare that stabilize AD.

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Current Economic Conditions

Influences consumer and business confidence affecting AD.

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Role of Fiscal Policy in AD

Government strategies to influence AD through spending and tax adjustments.

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Monetary Policy Impact

Central bank actions that affect money supply and interest rates, influencing AD.

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Study Notes

Aggregate Demand (AD) and the AD Curve

  • Definition of Aggregate Demand (AD): The total spending on domestic goods and services at different price levels in an economy.

  • Components of Aggregate Demand: Consumption (C), Government spending (G), Net exports (X-M). Savings (S) is not a component of AD.

  • Shape of the AD Curve: Downward sloping. A higher price level reduces purchasing power (decreasing consumption, investment, and net exports), leading to lower aggregate demand.

  • Movement vs. Shift along the AD Curve: A change in the price level causes a movement along the AD curve, while factors like consumer confidence, interest rates, and government spending cause a shift of the entire AD curve.

Causes of AD Shifts

  • Consumption (C): Lower income taxes increase disposable income, boosting consumption and shifting AD to the right. Conversely, an increase in interest rates or a fall in consumer confidence would reduce consumption and shift AD to the left.

  • Investment: Increased business confidence leads to more investment, shifting AD to the right.

  • Government Spending (G): Increased government spending shifts AD to the right, decreased government spending, shifts AD left.

  • Net Exports (X-M): A weaker domestic currency (depreciation) increases net exports (exports cheaper, imports more expensive), leading to a rightward shift in AD. A stronger currency decreases net exports (exports more expensive, imports cheaper), resulting in a leftward shift in AD. A recession in a major trading partner would decrease AD because of reduced demand for exports.

  • Interest Rates: Higher interest rates increase the cost of borrowing, reducing consumption and investment, shifting AD left. Lower rates encourage spending & investment which shifts AD right

Inflation's Effect on AD

  • Inflation erodes real incomes, reducing consumption, and shifting AD to the left.

Policies to Increase AD

  • Lowering interest rates and increasing government spending can effectively boost aggregate demand during a recession.

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Related Documents

MCQs on Aggregate Demand (AD) PDF

Description

Explore the concept of Aggregate Demand (AD) and its components, including consumption, government spending, and net exports. Understand the factors that cause movements and shifts along the AD curve, and how elements like consumer confidence and interest rates influence AD. This quiz will enhance your understanding of economic principles related to aggregate spending.

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