4.2.4 Aggregate demand and the level of economic activity

• What does Aggregate Demand (AD) represent in economics?

  Total demand for final goods and services
• What is the formula for Aggregate Demand (AD)?

  $AD =$$C +$$I +$$G +$$(X - M)$
• Match the component of AD with its description:

  Consumption (C) ↔️ Household spending on goods and services

  Investment (I) ↔️ Business spending on capital goods

  Government Spending (G) ↔️ Public sector spending on infrastructure

  Net Exports (X-M) ↔️ Difference between exports and imports
• What is the purpose of the Aggregate Demand (AD) equation?

  Summarize components of AD
• Lower interest rates increase Aggregate Demand (AD).


  True
• Increases in government spending lead to a rise in AD
• A depreciation of the domestic currency increases Net Exports (X-M) and shifts AD to the right.

  True
• Lower interest rates decrease the cost of borrowing
• Changes in AD can lead to changes in the overall level of economic activity.


  True
• Lower interest rates increase AD by making borrowing more affordable
• Increased government spending shifts the AD curve to the right.

  True
• The formula for Aggregate Demand is AD = C + I + G + (X - M
• Increased consumer confidence shifts the AD curve to the right.


  True
• A depreciation of the domestic currency makes exports cheaper and imports more expensive
• Higher consumer confidence leads to higher consumption
• What happens to AD when households feel more secure about their jobs and incomes?

  AD increases
• Movement along the AD curve is caused by changes in the price level.


  True
• Aggregate Demand is the sum of expenditures by households, businesses, government, and foreign entities
• What does Aggregate Demand (AD) represent?

  Total demand for final goods and services
• What is the formula for Aggregate Demand?

  $AD =$$C +$$I +$$G +$$(X - M)$
• A movement along the AD curve occurs when only the price level changes.

  True
• What happens at the AD equilibrium point?

  AD equals AS
• Changes in consumer confidence can shift the AD curve.


  True
• A shift of the AD curve due to changes in interest rates leads to a new equilibrium
• Household spending on goods and services is referred to as Consumption
• Investment refers to business spending on capital goods.


  True
• The difference between exports and imports is referred to as Net Exports
• Steps of the process when interest rates decrease on Aggregate Demand (AD)

  1️⃣ Interest rates decrease

  2️⃣ Cost of borrowing decreases

  3️⃣ Investment and consumption increase

  4️⃣ AD shifts to the right
• What happens to Aggregate Demand (AD) when consumer confidence increases?

  AD shifts to the right
• How does increased consumer confidence affect Aggregate Demand (AD)?

  Shifts AD to the right
• What is the impact of changes in Aggregate Demand (AD) on the economy?

  Changes in economic activity
• Increases in government spending directly increase AD, shifting the curve to the right
• What are the key determinants that can cause shifts in the AD curve?

  Interest rates, consumer confidence, government spending
• How does higher consumer confidence affect AD?

  Raises AD
• Match the component of AD with its description:

  Consumption ↔️ Household spending on goods and services

  Investment ↔️ Business spending on capital goods

  Government Spending ↔️ Public sector spending on infrastructure

  Net Exports ↔️ Exports minus imports
• Order the components of AD from largest to smallest, based on their general contribution to economic activity.

  1️⃣ Consumption (C)

  2️⃣ Government Spending (G)

  3️⃣ Investment (I)

  4️⃣ Net Exports (X - M)
• What is the effect of lower interest rates on investment and consumption?

  Both increase
• How does increased government spending affect the AD curve?

  Shifts it to the right
• A depreciation of the domestic currency increases net exports.

  True
• A depreciation of the domestic currency makes exports cheaper, increasing net exports