Aggregate Demand

The following are the subtopics of aggregate demand:

• Consumption
• Investment
• Government spending
• Net exports
• Aggregate demand curve
• Aggregate demand shock
• Aggregate demand management
  Aggregate demand (AD) is the total demand for goods and services in an economy at a given time and price level. It is the sum of consumption (C), investment (I), government spending (G), and net exports (NX).

Consumption is the largest component of aggregate demand, accounting for about two-thirds of total spending. It is the amount of goods and services that households buy at a given time and price level. Consumption is determined by a number of factors, including disposable income, wealth, and expectations about future income and prices.

Investment is the purchase of new capital goods, such as factories, machines, and equipment. It is also the purchase of new residential housing. Investment is determined by a number of factors, including the expected rate of return on investment, the cost of capital, and business confidence.

Government spending is the amount of money that the government spends on goods and services, such as defense, education, and infrastructure. Government spending is determined by a number of factors, including the government’s fiscal policy, the level of economic activity, and the political climate.

Net exports are the difference between the value of exports and the value of imports. When a country exports more than it imports, it has a trade surplus. When a country imports more than it exports, it has a trade deficit. Net exports are determined by a number of factors, including the exchange rate, the relative prices of domestic and foreign goods, and the level of economic activity in other countries.

The aggregate demand curve is a graph that shows the relationship between the aggregate price level and the quantity of aggregate demand. The aggregate demand curve is downward-sloping because, at higher price levels, consumers and businesses will spend less on goods and services.

An aggregate demand shock is an event that causes the aggregate demand curve to shift. Aggregate demand shocks can be caused by a number of factors, including changes in government spending, changes in taxes, changes in the exchange rate, and changes in consumer confidence.

Aggregate demand management is the use of fiscal and monetary policy to influence the level of aggregate demand. Fiscal policy refers to the government’s use of taxes and spending to influence the economy. Monetary policy refers to the central bank’s use of interest rates and open market operations to influence the economy.

Fiscal policy can be used to increase aggregate demand by cutting taxes or increasing government spending. Monetary policy can be used to increase aggregate demand by lowering interest rates or increasing the money supply.

Aggregate demand management is used to achieve a number of economic goals, including full employment, price stability, and economic growth.
Consumption

• What is consumption?
  Consumption is the total amount of goods and services that individuals, businesses, and governments buy in a given period of time.

• What are the factors that affect consumption?
  The factors that affect consumption include disposable income, the interest rate, and expectations about the future.

• What is the marginal propensity to consume (MPC)?
  The MPC is the amount of additional consumption that occurs when disposable income increases by one dollar.

• What is the multiplier effect?
  The multiplier effect is the process by which an increase in spending leads to a larger increase in output.

Investment

• What is investment?
  Investment is the purchase of new capital goods, such as machines and equipment, and the addition to inventories.

• What are the factors that affect investment?
  The factors that affect investment include the interest rate, the expected rate of return on investment, and the availability of credit.

• What is the accelerator principle?
  The accelerator principle is the idea that an increase in output leads to an even larger increase in investment.

Government spending

• What is government spending?
  Government spending is the total amount of money that the government spends on goods and services, transfer payments, and interest payments.

• What are the factors that affect government spending?
  The factors that affect government spending include the size of the government, the political ideology of the government, and the state of the economy.

• What is the crowding-out effect?
  The crowding-out effect is the idea that an increase in government spending leads to a decrease in private investment.

Net exports

• What are net exports?
  Net exports are the difference between the value of exports and the value of imports.

• What are the factors that affect net exports?
  The factors that affect net exports include the exchange rate, the relative prices of domestic and foreign goods, and the income levels of countries.

Aggregate demand curve

• What is the aggregate demand curve?
  The aggregate demand curve is a curve that shows the relationship between the aggregate price level and the aggregate quantity demanded.

• What are the factors that shift the aggregate demand curve?
  The factors that shift the aggregate demand curve include changes in consumption, investment, government spending, and net exports.

Aggregate demand shock

• What is an aggregate demand shock?
  An aggregate demand shock is an event that causes the aggregate demand curve to shift.

• What are the types of aggregate demand shocks?
  The types of aggregate demand shocks include positive shocks, such as a decrease in the interest rate, and negative shocks, such as an increase in the price of oil.

Aggregate demand management

• What is aggregate demand management?
  Aggregate demand management is the use of fiscal and monetary policy to influence the aggregate demand curve.

• What are the goals of aggregate demand management?
  The goals of aggregate demand management are to achieve full employment, price stability, and economic growth.

• What are the tools of aggregate demand management?
  The tools of aggregate demand management include fiscal policy, monetary policy, and exchange rate policy.

• Which of the following is not a component of aggregate demand?
  (A) Consumption
  (B) Investment
  (C) Government spending
  (D) Net exports
  (E) Exports

• The aggregate demand curve shows the relationship between the aggregate price level and the quantity of real output demanded.
  (A) True
  (B) False

• An aggregate demand shock is a sudden change in aggregate demand that can cause the economy to move along the aggregate demand curve or shift the aggregate demand curve.
  (A) True
  (B) False

• Aggregate demand management is the use of fiscal and monetary policy to influence aggregate demand and stabilize the economy.
  (A) True
  (B) False

• Which of the following is an example of an expansionary fiscal policy?
  (A) Increasing government spending
  (B) Lowering taxes
  (C) Both A and B
  (D) Neither A nor B

• Which of the following is an example of a contractionary fiscal policy?
  (A) Increasing government spending
  (B) Lowering taxes
  (C) Both A and B
  (D) Neither A nor B

• Which of the following is an example of an expansionary monetary policy?
  (A) Buying government bonds
  (B) Lowering interest rates
  (C) Both A and B
  (D) Neither A nor B

• Which of the following is an example of a contractionary monetary policy?
  (A) Selling government bonds
  (B) Raising interest rates
  (C) Both A and B
  (D) Neither A nor B

• Which of the following is a positive aggregate demand shock?
  (A) A decrease in the price of oil
  (B) An increase in consumer confidence
  (C) Both A and B
  (D) Neither A nor B

• Which of the following is a negative aggregate demand shock?
  (A) An increase in the price of oil
  (B) A decrease in consumer confidence
  (C) Both A and B
  (D) Neither A nor B