Aggregate Demand (AD)

What is the definition of Aggregate Demand?

• Aggregate demand refers to the relationship between the overall price level in an economy and the total output demanded. It is composed of four components: consumption, investment, government expenditure, and net exports (exports minus imports).

• Aggregate demand is the total supply of goods and services in an economy at a given overall price level and in a given time period.

• Aggregate demand is the total amount of money in circulation in an economy at a given time.

• Aggregate demand is the total amount of goods and services produced in an economy at a given time.

Why does the Aggregate Demand Curve slope downward?

• The AD curve slopes downward due to three key effects: Wealth Effect, Interest Rate Effect, and Net Export Effect.

• The AD curve slopes downward because of the substitution effect.

• The AD curve slopes downward due to government intervention.

• The AD curve slopes downward because of technological advancements.

What is the Wealth Effect in the context of the Aggregate Demand Curve?

• When the price level falls, the purchasing power of money increases, making people feel wealthier in real terms, encouraging higher consumption and investment, which raises total demand.

• When the price level rises, the purchasing power of money decreases, leading to lower consumption and investment, which reduces total demand.

• When the government increases taxes, reducing disposable income and thus decreasing total demand.

• When interest rates rise, making borrowing more expensive and reducing total demand.

What causes a shift in the AD Curve?

• Changes in non-price factors such as changes in consumption, investment, government spending, or net exports cause the entire AD curve to shift.

• Changes in the price level.

• Changes in the money supply.

• Changes in the labor force.

Which of the following factors increases private consumption, thereby increasing AD?

• Higher disposable income

• Lower desire to save

• Lower interest rates

• Greater wealth

Fill in the blank: Lower interest rates reduce the cost of borrowing, which encourages consumption and raises ____.

• AD

• inflation

• unemployment

• taxes

What happens to aggregate demand when the government increases its spending on goods and services?

• Aggregate demand increases.

• Aggregate demand decreases.

• Aggregate demand remains unchanged.

• Aggregate demand fluctuates unpredictably.

How does a depreciation of the domestic currency affect exports and imports?

• A depreciation of the domestic currency makes exports cheaper for foreigners and imports more expensive for residents, improving net exports and increasing AD.

• A depreciation of the domestic currency makes exports more expensive for foreigners and imports cheaper for residents, worsening net exports and decreasing AD.

• A depreciation of the domestic currency has no effect on exports and imports.

• A depreciation of the domestic currency makes exports and imports equally expensive for both foreigners and residents.

How do higher foreign price levels affect domestic goods and aggregate demand (AD)?

• Higher foreign price levels make domestic goods relatively more competitive, boosting exports and reducing imports, which raises AD.

• Higher foreign price levels make domestic goods less competitive, reducing exports and increasing imports, which lowers AD.

• Higher foreign price levels have no effect on domestic goods and aggregate demand.

• Higher foreign price levels lead to a decrease in domestic production, which lowers AD.

What is the impact of economic growth in trading partner countries on domestic exports and AD?

• Economic growth in trading partner countries leads to higher demand for domestic exports, increasing AD.

• Economic growth in trading partner countries decreases demand for domestic exports, reducing AD.

• Economic growth in trading partner countries has no effect on domestic exports and AD.

• Economic growth in trading partner countries leads to lower demand for domestic exports, decreasing AD.